Question: I am in the military and will be transferred across the country in three years. We will certainly be selling our home at that time and I'm wondering if refinancing makes sense if we are going to hold the loan for only three years. We are paying 7.25 percent and have a balance of $220,000. Our principal and interest payment is $1,535. Our property is worth at least $300,000. Isn't it true that you need to hold the loan for a long time if your refinance?

Answer: Not at all. Thanks to competition in the industry, there are lots of clever products available. Two mortgage terms to remember: "Zero Cost" and "Balloon".

This is an easy problem to solve. You are paying 7.25 percent on your current loan. You will be selling the house and hence paying off the mortgage in three years. You are hoping to be a beneficial participant in the current Mother of All Refinance Waves.

Here's what you need: A loan rate that is fixed for at least three years that is lower than 7.25 percent. You also must pay nothing for that loan rate.

Let me pull out some rate sheets and I'll give you some examples.

30 Year Fixed Rate - 6.625 percent. No points and no closing costs. Your new P&I payment is $1,409. You save $126 per month or $4,536 over three years. Definitely a no-brainer.

Seven Year Balloon: 6.25 percent. No points and no closing costs. The rate is fixed for the first seven years. In year eight, you must convert the loan to market rate for the remaining 23 year term. Your new P&I payment is $1,355. You save $180 per month or $6,480 over three years. A better no-brainer.

Five Year Balloon: 6.00 percent. No points and no closing costs. The rate is fixed for the first five years. Your new P&I payment is $1,319. You save $216 per month or $7,776 over three years. The best no-brainer.

As I said, there are lots of interesting programs available to meet lots of needs. Consult with a recommended mortgage broker. He should have some zero cost balloons that will enable you to save some decent money. One caveat - make sure you don't take out a mortgage that carries a prepayment penalty. That could defeat the purpose.

Published: August 21, 2002

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