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Not too late to refinance, but do it carefully

Updated: May 3, 2013 12:14PM

Originally published: November 7, 2005

Americans have become experts at pulling money out of their homes -- to the tune of $600 billion in 2004. Much of that refinancing was done at adjustable interest rates -- and now the rates are adjusting upward. So maybe it’s time to reverse the process, and start putting money into your home equity. Or at least to refinance those home-equity lines of credit to a fixed-rate loan.

In the second half of last year, 63 percent of new mortgages were subject to interest rate adjustments. And 23 percent of new loans were “interest-only” loans. Those are potentially the most dangerous, although they make home ownership affordable.

If you have a $200,000 interest-only mortgage at 5.25 percent, you’ll pay $875 per month on your loan. But if rates rise just 1.25 percent, to 6.5 percent, the monthly payment on that interest-only loan jumps to $1,083. That can put a serious dent in your budget -- even without rising utility costs.

If you’re thinking about re-financing, the first thing to consider is where to refinance. Obviously, you’ll check rates at local institutions and at online Web sites such as and major banking firms.

Mortgage broker vs. bank

The critical ingredient in refinancing your mortgage is finding someone you trust.

A good place to start is your credit union, bank or the financial institution that currently holds your mortgage. But with personal banking relationships scarce these days, you might also ask several friends for a reference to a mortgage broker.

Randy Johnson, author of How to Save Thousands of Dollars on Your Home Mortgage ($12.21 on, advises you to “look for a mortgage broker who is your advocate, and who charges a reasonable fee and doesn’t lie about it.”

He suggests you get a written fee agreement, in addition to the standard “good faith” estimate of all the closing charges and brokerage fees or compensation paid to the broker by the lender. You can get a sample form at Johnson’s Web site, www.Loan-Wolf. com.

The advantage of a good mortgage broker is that he or she can get different quotes from different lenders for different products. Chicago-area mortgage broker David Hochberg of Townstone Financial, says, “A good mortgage broker is constantly researching their lenders’ rate sheets to find the most competitive rates for their customers for a specific product on that specific day.”

If you’re planning to stay in your home for many years, it makes sense to take a fixed rate 30-year mortgage. But if you’ve already lived in your home for several years, that may stretch out the mortgage. So consider a 15-year fixed-rate mortgage. The rate will be slightly lower, but the payments will be slightly higher. Over the long run, though, you’ll save a fortune in mortgage interest.

Everyone hates to write a check for closing costs and points, so there is always a lot of maneuvering on this subject. Try to avoid paying points to lower your rate -- unless your employer is covering this cost through a job relocation package or you’re planning to stay in the home forever, in which case the lower rate will save you a lot of interest over the years.

Closing costs may include appraisal, credit report, title fees, flood certification and lender underwriting fees, all of which usually average about $2,000.

Yes, there are commercials for “no-fee” refinancing -- though at a slightly higher rate. You may not mind paying that higher rate (and paying the broker slightly more commission) if you’re staying in the home for only a few years, and the refinancing saves you money every month. The mortgage broker uses the extra commission to pay for your closing costs.

It’s the monthly payment

Says Hochberg: “It’s not about the rate; it’s about the monthly payment.” He specializes in refinancing to eliminate other personal debt.

Within months, eliminating other debt improves the homeowner’s credit score. Then they can refinance again at a lower rate accorded to those with better credit.

With so much refinancing going on, it’s tempting to think you can beat the mortgage market. But don’t get caught in a vulnerable position just because you’re searching for a low monthly payment. With rising rates, today’s low payment on an adjustable rate or interest-only loan could easily soar into unaffordable territory. And that’s The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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