Question: Our current mortgage carries an interest rate of 8.25 percent, and several friends have strongly suggested that we refinance. Exactly what does that mean? Are there costs associated with this process, and what kind of mortgages are available? This is our first home and we will probably stay here for a long time.

Answer: Refinancing has become a popular topic of conversation throughout the country. It is actually refreshing to hear people discuss mortgage interest rates at lunch or at cocktail parties, instead of Anthrax or the Pentagon bombing.

To "refinance" simply means that you substitute a new mortgage in place of your current one. Although there are legal and technical distinctions between a "mortgage" and a "deed of trust," for all practical purposes (and for purposes of this article) the terms are synonymous.

Let's take this example: your house is worth $300,000, and your current mortgage balance is $200,000. Your interest rate is 8.25 percent, and your monthly mortgage payment (excluding escrow for taxes and insurance) is $1,725. Currently, mortgage interest rates are very low, hovering below 6 and one-half percent.

If you refinance your current mortgage and obtain a new loan in the amount of $200,000 at 6.375 percent, your new monthly payment (again excluding taxes and escrow) will be $1,248 -- or a monthly savings to you of $477. In one year, you will be able to save over $5,700 -- or will you?

Here are some "do's and don'ts" which you should keep in mind while you contemplate whether this is the time to refinance:

DO the numbers. Calculate the new interest rate you are considering, and plug in the closing costs. Your potential new lender must give you a "Good Faith Estimate" of all of the costs you will have to pay in order to put that new loan on the books. In our example, while the savings look attractive, in reality the first year savings will be considerably lower, after you pay the various closing and settlement costs.

DO talk to your current lender first. Some lenders -- who do not want to lose your business as well as your loan -- may be willing to modify your existing loan so that you will get a lower rate at no cost -- or at reduced settlement costs.

For example, your current lender already has an appraisal on your house; there should be no reason to require a new appraisal -- at a cost of $300- 500.

DO learn what kinds of mortgage loans are available. Currently, there is a wide variety of loans to chose from, ranging from fixed, conventional to adjustable-rate mortgage (ARM) loans. Within each category, there are further options, such as a fixed 30 or a fixed 15 year loan, a one year ARM, a five year ARM, or a seven year ARM. When you talk with lenders, ask them the following questions:

1. What loan programs do you have available for me?

2. Give me a the projected monthly payment for each of the loans you can offer me,

3. What up-front costs will I have to pay if I use your services?

DO comparison shopping. Currently, mortgage lenders are quite busy and they may not respond promptly to your phone calls. But don't give up; keep trying. There is some competition in the mortgage lending business, and you should get at least 3 quotes from three different lenders before you decide which lender to use. Make a chart of all of the expenses charged by each lender you talk with. Determine if the lender will charge you any up-front points. A point is one percent of the loan amount, and if you were to borrow $200,000, each point you pay will cost you $2,000. Each point is the equivalent of approximately 1/8 of an interest rate. Thus, you may find a lender who will be offering 6.25 percent with one point, but 6.375 with no points

DO inquire about "lock-ins" and "float downs". Our economy -- while strong -- is going through unprecedented times; mortgage interest rates are very volatile, and subject to rapid change. You should understand that it will probably take between 30 to 60 days in which to close on your refinance loan from the time you first make application. The rate on the day your started the process may be quite different from the rate on the day of closing.

Lenders now offer two different kinds of protections:

• Lock in rates: here, the lender commits that your rate is "locked in" for a period of time, usually 30 days. You must get written confirmation of this fact from the lender.

• Float down rates: here, the lender will agree that should rates fall from the time of loan application, you will get the benefit of the lower rate. Some lenders will charge you a fee for this commitment; others will not. You must get written confirmation from the lender as to their practices if you opt for this float down concept.

DO NOT rely exclusively on promotional material you receive in the mail. Also, do not accept a loan from a telephone solicitation -- without first checking out that potential lender.

There are many scam artists -- I call them "loan sharks" -- trying to capitalize on the great demand for refinancing. If you are doubt as to the validity of a potential lender, contact your local Better Business Bureau, your State (or local) Banking Commissioner or even the AARP for further information.

DO NOT rely exclusively on a lender you have found on the Internet. Again, while many of these lenders may be legitimate, there are a lot of fraudulent people and practices in the world, and you must be on your guard at all times.

DO determine if you will have to pay a prepayment penalty for paying off your current loan early. Some lenders are taking advantage of a Federal law enacted in l982 (entitled Alternative Mortgage Transactions Parity Act), which allows mortgage lenders to charge prepayment penalties despite local laws to the contrary.

DO not use the settlement company or title attorney recommended by your lender without shopping around to get comparison costs. Title companies and title attorneys charge various fees for the services they provide, and often these differences are substantial. You have the absolute right to select your own title attorney, and should not be pressured into using the company that the lender suggests.

DO confirm with your current lender whether you will be charged a late fee if you do not make your last mortgage payment to them. Let us assume that you will close on your new loan on December 10th. Keep in mind that when you refinance your mortgage, unless you use the same lender, there is a three-day "cooling off" period under the Federal Trust in Lending Act before the new loan can be funded.

Thus, there is a strong possibility that the current lender will not receive the pay-off funds until after the 15th of December, and many lenders will hit you with a late fee if payment is not received by that date. To be on the safe side, if settlement on the refinance loan will take place after the 8th or 9th day of any month, make your last mortgage payment to the old lender, but advise your title attorney of this fact so that the last payment will be calculated into the final pay- off statement.

In the final analysis, you should understand that when you refinance your current mortgage, in effect you are going to a brand new settlement. The only difference is that there is no buyer or seller present at closing, and there will be no real estate broker involved.

We used to quote a rule of thumb that one should refinance when rates drop at least 2 percent from your current mortgage. With the tremendous volatility of the financial marketplace, this 2 percent rule of thumb probably makes no current sense. Since rates are extremely low now, and no one knows how long this will last, everyone should seriously consider refinancing today.

For more articles by Benny Kass, please press here.

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Copyright 2001 Benny Kass. Posted by Realty Times with permission.

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Published: November 26, 2001

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