Refinancers rush in to lock in lower rate

The stock market roller-coaster ride continues, the banks are asking for more money, the new administration tells Congress that another $350 billion may not be enough, and all the while consumer confidence is about as low as low can go. Apparently, I’ve been watching too much television lately.

In the face of all this economic doom and gloom, there is a silver lining for those of us who own (or would like to own) residential real estate. It’s the continuing decline of long-term interest rates and the wonderful effect it’s having on our long-term ownership costs.

The benchmark 30-year fixed-rate loan dropped below the 5 percent range recently, making it more affordable than ever to buy or refinance a home.

This is a particularly welcome development because there are literally millions of home loans on the books today with interest rates in the 6 percent range and higher. And borrowers are lining up to refinance in numbers not seen for quite a while.

As an example, let’s say you have a loan of $200,000 that you took out in the summer of 2006. At that time, the typical rate was 6.75 percent. Assuming you selected the industry standard term of 30 years to repay this debt, your monthly payment of principal and interest would come to just over $1,297.

But if you refinanced today, and took out a new loan for the same term at today’s rate of 4.875 percent, your monthly payments would drop to just over $1,058, giving you a monthly savings of almost $239 in interest payments alone. That translates into an annual bonus of around $2,850 during the first year.

And the savings will continue, although in decreased amounts, for the remaining life of the loan. All told, if you paid the loan all the way to its term in 30 years, the savings would exceed $85,000. I always hesitate to share the dramatic total projected savings number because so few owners actually keep a loan its full term. But at these rates, it might actually happen.

According to the Mortgage Bankers Association, refinancings now make up about 80 percent of all new loan applications, and this activity couldn’t come at a better time for lenders. With mortgage companies closing right and left, there at least is now enough business to pay the bills next month.

Here are some tips to help you save additional money if you are considering a refinance:

» Call your existing lender and see whether it offers any type of “streamline” refinance program. If available, these programs can save you significant closing expenses by allowing a “modification” of existing loan documents instead of forcing you to pay for a complete new round of settlement fees. Chief among the savings in Georgia is the ability to avoid state intangibles tax of $3 per $1,000 of new loan. If the existing loan is modified, you can likely avoid this meaningless fee.

» Also, when you refinance, the lender will likely require a new “lender’s title insurance” policy. That’s to make sure you still own the property and that there are no new claims against your ownership. But don’t fall into the trap of purchasing a new “owner’s title policy” unless you never purchased one in the first place. If you already purchased owner’s title insurance in the past, there is no need for you to replace that policy. Because your ownership of the property has been continuous, you still have full protection under the original policy. However, if you failed to buy an owner’s policy in the past, now is a good time to obtain this protection. That’s because you qualify for a lower rate while the lender is getting its policy at the same time. It’s called “simultaneous issue,” and your closing attorney will explain it in detail.

» If you do have to pay another round of closing costs, be sure to shop and compare among lenders. Unless your existing lender offers you a discount, there is no advantage to remaining its customer. It is to the lender’s advantage to preserve its relationship with you, and if it fails to see that, you will likely find a better deal elsewhere. In order to compare apples to apples, ask each lender you consult for a written good-faith estimate of all the expenses you will be asked to pay, as well as a written commitment to a specific interest rate. Ignore the government-inspired APR and focus on the “note rate” instead. That rate and the good-faith estimate will cover all your costs.

» Finally, consider how long you plan to keep paying on this new loan, and whether you might be better off allowing the lender to pay your closing costs and charge you a slightly higher rate in return. This is called a zero closing cost loan and benefits those who plan to move in the next five years.

As usual, it’s always a good idea to talk with your CPA or financial professional to see how a refinance transaction will benefit your situation. But don’t expect this low rate to last forever.


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It is a opportunity of the investors avail because you're not just owning a house but also saving money.