Do not pass up great chance to refinance mortgage

I wish I knew how many American homeowners are out there paying every month on their existing home loans, unaware that they would benefit from refinancing. I am sure it’s in the millions. And yet, the message that it’s time to refinance has not gotten through to them. So this week, we’ll try and persuade another million or so borrowers to make the call to their local mortgage lender to investigate the possibility of saving money through a simple refi transaction.

Q. My current home loan is a fixed rate at 6.5 percent interest. We will probably stay in the house another few years but may move after that. Is it worth going to the trouble of a refinance loan?

A. The answer is probably yes. I say “probably” because rates change daily, but on the day I wrote this, 30-year fixed-rate refinance loans for well-qualified buyers were in the range of 4.625 percent. Because your current loan balance is right around $200,000, you could save as much as 1.875 percent per year. That equals around $3,750 in savings during the first year alone. If you continue to own the house for several years, you would come out well ahead by refinancing now.

What about the closing costs? How much will that amount to, and how long will it take me just to break even?

Smart question. The closing costs associated with refinance loans are typically the factor that discourages borrowers from going through with the transaction. On a typical loan of about $200,000, the average cost to refinance, including all fees and expenses, would be about $4,600. That works out to about 2.3 percent of the amount borrowed. On a smaller loan, the costs could reach as high as 3.0 percent, and on a higher dollar amount loan, the settlement costs could be as low as 2.0 percent. That’s because some costs, such as the attorney fee and the appraisal fee, tend to remain fixed regardless of loan amount. Other costs, such as the lender’s origination fee, are typically quoted as a percentage of the total loan amount.

So it looks like it would take me almost a year and a half just to reimburse myself for the out-of-pocket closing costs. Right?

Yes, that is true. Your monthly interest savings would be approximately $271, so you would break even in about 17 months. But after that, you would be saving almost $271 every month. The longer you continue to own the property, the more you would save.

Is there any other way to pay for these settlement costs?

Well, you could choose to add these expenses to the loan amount. But that’s sort of like robbing Peter to pay Paul. In other words, to get back to the loan balance you started with, you would have to send in the savings as “additional principal” for about 17 months, so you are in about the same position as before.

Could I accept a slightly higher interest rate and ask the lender to pay my expenses under a “zero closing cost” program?

The rate I mentioned above is for a standard “rate and term” refinance for borrowers with good credit and borrowing 75 percent or less of the appraised value of their home. Most lenders allow closing costs to be added to the loan amount and still get that preferred rate. But if you seek a “zero closing cost” option, the rate moves substantially higher quickly. The best rate I could find for a zero closing cost loan in your situation was 5.75 percent, and some were much higher than that. Since your existing loan is at 6.50 percent, a reduction of 0.75 percent would save you about $125 monthly. That’s still worthwhile, but it pales in comparison to the savings shown in the previous example.

I have a friend with an adjustable-rate loan on his house. His rate is below mine already. Why should he refinance?

Because rates may very well climb higher in the future. There is great financial security in knowing your home loan rate is fixed at a historically low rate, and that it can never be changed unless you choose to do so. Unfortunately, many ARM borrowers who bought over the last few years were approved during periods of loose underwriting guidelines, and may not qualify under today’s stricter requirements. Likewise, if their home will not appraise for enough to allow a fully documented “rate and term” refinance with a new loan balance of 75 percent of the home’s value, they may not qualify for the attractive rate we discussed here.

Are many borrowers running into problems with their homes failing to successfully appraise for the same amount as they did when the home was purchased?

It varies on a case-by-case basis, but lenders are demanding that appraisers use only sales from the last six months as indicators of comparable value. In some situations, this forces appraisers to use “distress” sales instead of “arm’s-length” transactions. This can have the effect of dramatically lowering the value of a home on paper. The good news is that lenders announce new programs daily, and one may be designed to fit your needs. As always, I recommend that you shop and compare among local lenders to find the best loan for your individual situation.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.