Blink and Miss

The refinancing opportunity of a lifetime has gone by like a semi on a dirt road blasting past some poor fellowtrying to change a tire. Why, the slipstream alone was enough to knock a car off a jack.

There’s a thing or two worth studying while the gravel settles.

Next to buying the house in the first place, getting a mortgage is the largest single financial decision to face mostfamilies. During the long search for a home, consumers can bone up on mortgages; however, no civilian cankeep all the weird vocabulary and theory of mortgages in memory for long.

It’s not fair, but the decision to refinance often must be made fast, without a reasonable opportunity for study;and sometimes — in a V-shaped interest rate bottom — no time at all.

So, here follows a simple, five-step guide, designed to help you make the refinance decision under pressure.

Of course, it’s not simple at all, but the outline will help with the heart of the matter- do it?… or not. Clip thiscolumn, drop it into a folder labeled “Refinance”, and haul it out to take with you to your next refinanceapplication. Any able banker can help you review the steps and concepts below, and then to reach a quick,confident decision.

1. Subtract the rate you can get with no points and no origination fee from the rate you have.
2. Multiply the resulting rate (1%, .75%, 1.5%…) times your current loan balance, and the result is yourapproximate annual interest savings in the first several years of your new loan.
3. Mortgage interest savings are deductible, so multiply the interest savings by .67 to convert them to after taxdollars (assumes 28% IRS plus 5% Colorado brackets).
4. Assume closing costs are 1600 non-deductible dollars, and divide the after-tax interest savings into 1600. Ifyou get a result of “1.0”, you will recover closing costs in exactly one year. If you get a fractional answer, youwill recover your closing costs in that fraction of a year. If you get a number larger than “1.0”, it will take youthat number of years to recover costs, and you must consider how long you will live in the house, or how long itmay be until the next refinancing opportunity.
5. If you got a result of “1.0” or less, commit quickly to refinance. Do not ask Bill Clinton for furtherinterpretation. Proceed. Do it. Do not wait for markets to improve further. Ever. Lock your rate now.

For most consumers, this abbreviated guide to pulling the trigger begs as many questions as it answers; and so,here follow the most important answers.

• Don’t evaluate a refinance based on changes in your monthly payment. If you have paid on a loan for a year,and refi back out to 30 years, re-amortization creates the illusion of saving money when the lower payment isreally just stretched-out principal.
• Don’t ever ever ever pay an origination fee or discount point on a refi to “buy down” the rate. Such fees aredeductible, but over the remaining life of the loan, not in the year paid. Even when instantly deductible on apurchase loan, fee recapture takes five to six years; on refis, a decade.
• Refi closing costs are fixed costs changing with the reissue rates on title insurance and hardly at all with theloan amount or the price of the home. $1600 is a good Colorado guess, unless you try to fold costs into theinterest rate.
• The most extreme form of cost-folding, the so-called “no cost” refi, is an excellent idea so long as you get onehalf percent of your loan amount in cost relief for each one eighth of a percent rise in the interest rate (repeatafter me…). That equation is a crucial test, as the cost relief is often a diminishing return versus higher rate.
• Get an explanation, but do not worry about all the money flying around in interest pro-rations, skippedmonthly payments, and re-built escrow accounts — a total due at settlement (add it to your loan!) often doublethe real cost of the refinance. Both your old loan servicer and your new one are heavily regulated and examined,and cannot keep or take money to which they are not entitled.
• Remember that mortgage rates move real time with the bond market, intra-day; and almost anything you hearor see in the news is out of date.
• Be careful shopping during a refi frenzy. Indecision, or trying to conduct a rate auction among lenders, orappearing reluctant to close if rates fall further will tend to drive away the best bankers and firms. “Best” in a refifrenzy means those who will give you a fair deal whether you press or not, and who will be sure to close youbefore your rate commitment expires.

Last, an apology on behalf of the mortgage industry. All firms — the industry itself — are limited by the numberof files they can process in a given time frame; and at the rates prevailing in a four-day stretch in early Octobereveryone in the US should have refinanced. At our firm, we could not even return calls from many pastcustomers to tell them we couldn’t make room, and I’m sorry for that.