Question: I would like to ask your opinion on a loan that was recently proposed to me as the best refinancing option. The loan carries a fixed rate of 6.75 percent with a thirty year term with interest-only payments. The loan carries no points, no fees, no balloon and no prepayment penalty. I live in Washington, D.C. Is this loan a thumbs up or a thumbs down, in your opinion?

Answer: For me to give you a firm opinion on whether or not the offer is competitive in the marketplace, I would need to know the amount borrowed. Let me assume a loan amount of $300,000.

At the time of this writing, I see that a 30 year fixed loan with an interest-only payment option would carry a rate of 6.50 percent with no points. But you say that the program carries no fees. Does the loan officer mean no lender fees, such as the so-called "junk fees" like underwriting and document preparation? Or does he mean "zero cost" where the all the closing costs, including appraisal, title insurance, attorney, recording fees, and all other transactional fees are paid by the mortgage broker?

Let me explain how a zero cost refi works: Wholesale lenders offer not just a variety of programs to participating mortgage brokers, but several "coupons" within each program. For example, a wholesale lender will pay my company one percent of the loan amount if we deliver a 30 year fixed interest-only loan at a rate of 6.50 percent. Since the mortgage broker is being paid one percent by the lender, we offer the 6.50 percent rate to the borrower with zero points.

Alternatively, the lender pays the broker two percent if the rate delivered is 6.75 percent. A good mortgage broker might then offer to pay an amount equal to one percent of the borrower's transactional costs.

In Washington, D.C., total closing costs on a $300,000 refinance will total somewhere in the range of $2,900. This includes all transactional costs. The mortgage broker simply pays all of the closing costs with his two percent fee. The broker keeps the difference and the borrower eliminates all sunken costs by choosing a slightly higher tax deductible interest rate.

So, after taking the long way to answer your question -- yes, it appears that your offered rate is competitive in today's marketplace.

But we can't stop here. There's too much misinformation in the mortgage business. You need to make sure that the loan being offered to you is truly a "zero cost" refi. If all of the transactional closing costs are not being picked up by the mortgage broker, the 6.75 percent interest rate isn't competitive. Make sure you clarify the deal.

I have to take a step back for a minute. Your loan officer may be offering you a deal that's competitive, but is it the right program for you? Do you need a loan with an interest only payment feature? Interest only loans allow for a low payment because no principal is being curtailed. If you are not a disciplined saver, a 30 year fixed rate with a straight amortization might be better, not just because you will be paying down principal, but also because the interest rate is more favorable.

My point is this: You don't indicate whether or not you sat down with your loan officer and established your objectives, analyzed your current mortgage situation and pinpointed the most appropriate loan program.

Choosing the right mortgage program is more important than getting what is usually falsely perceived as the "best" rate.

Published: November 28, 2005

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.