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Mortgage Refinancing Tips

American consumers refinanced more than $2 trillion in mortgage loans in 2003 to lower their monthly payments, tap their home equity or pay off their mortgages sooner. If you are considering refinancing, here are some tips to help you save money and make the process easier.

What is the first step? Call your current lender and ask what it can do for you. Because the lender already has all of your relevant information, going through a formal refinance may be unnecessary. Some lenders will simply lower your rate without making any other changes to the loan. Other lenders may offer a “streamlined” refinance, which allows you to avoid certain closing costs. After your lender has made its best offer, shop around and try to find a better one.

Types Of Loan Products

Lenders can be very creative in structuring a loan to meet your cash-flow needs. Feel free to evaluate the more specialized products out there, but keep in mind that a fixed-rate loan meets most homeowners’ needs. Adjustable-rate mortgages (ARMs) have their supporters, but refinancing into an ARM while interest rates are at or near their all-time lows is not recommended. If you refinanced when rates were at their recent lows into a fixed-rate loan and interest rates return to their historical averages, you will be making below-average interest payments for years.

Make sure you know the maximum conforming loan amount. Lenders can easily sell conforming loans in the secondary markets, while nonconforming, or “jumbo,” loans are more difficult to transfer. Because lenders take additional risk by issuing nonconforming loans, these loans will always have higher interest rates. For 2004, the one-family-home conforming loan limit is $333,700, as set by the nation’s two largest mortgage buyers, the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). If you are looking to refinance and you are slightly over this limit, consider taking out a conforming loan and making up the difference with a second loan, such as a home equity loan or a home equity line of credit.

When comparing offers, do not compare a 15-year loan with a 30-year loan. Fifteen-year loans will have lower interest rates and higher monthly payments than 30-year loans. When deciding what term to pursue, you must ask yourself how soon you want to pay off your mortgage and how large a monthly payment you can afford. If you want to pay off your mortgage soon and cash is not an issue, you can choose the 15-year loan. If you cannot afford the payments on a 15-year loan, go with the 30-year loan.

Closing Costs, Mortgage Taxes And Points

Does that lender’s interest rate look too good to be true? Unfortunately, the lender may overcharge you on closing costs to make up the difference. When comparing loan offers, always remember to consider both the closing costs and the interest rates. In addition, if you are so inclined, you can try to negotiate certain service-related closing costs, such as the appraisal or the title search. Other closing costs, such as real estate taxes, are not negotiable. When negotiating, be realistic — remember that the lender is out to make a profit. Lenders will provide you with an up-front estimate of closing costs, but this is only a “good faith” estimate and is not guaranteed.

Total closing costs depend on several variables, including the state you live in and the lender you are using. Taxes are a main reason closing costs can vary from state to state. For example, New York homeowners must pay a state mortgage tax when they take out or refinance a mortgage. This tax can make refinancing expensive, especially on large loans. Fortunately, there is a way to avoid it. Ask your mortgage broker about a Consolidation, Extension, Modification, and Assignment (CEMA). The details of how a CEMA works are too complicated to discuss here, but you can avoid paying the mortgage tax by having the new lender rewrite your current loan instead of creating a new one. If you are not using a broker, there are lawyers who specialize in this area. Using a CEMA may cost a few hundred dollars, but the savings can be immense on large loans.

Your lender may offer you a reduced interest rate if you agree to pay a percentage of the loan up front. This is called paying “points.” If you are certain that you will stay in your home and will not refinance in the future, paying points can save you money over the long term. The small amounts that you save from month to month because of paying points will eventually add up to more than the cost of the points itself. However, if there is a chance that you will move or refinance before many years have passed, it is generally best to steer clear of points. If you pay points and then move or refinance shortly afterward, chances are you will have spent more on the points than you have made back in monthly savings. Remember that points paid on a refinance are not immediately deductible on your tax return. You must amortize the points over the life of the loan.

Make certain the loan you choose is the right one for you. How long do you plan to live in your house? If you have a short time horizon, an adjustable-rate loan may make sense, and you should be very careful about paying points. If you plan not to move for a long time, focus on finding a fixed-rate loan with the lowest interest rate. What is your cash situation? If available cash is an issue, you may choose to evaluate alternative loan products with payments that will track your expected income in the future.

Finally, there is always the sleep-at-night factor. Don’t let a refinance keep you up. If you have a personal relationship with your current lender, you may be comfortable accepting its offer after minimal shopping. If you are worried that your time is worth more than the potential savings from a refinance, use a mortgage broker to steer you through the process. If you are struggling with all the details, do not be afraid to enlist a broker, or ask for help from friends or family. The process of refinancing may be frustrating at times, but it is hard to argue with saving money.

Managing Vice President Paul Jacobs, of our Atlanta office, is among the authors of our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. He wrote Chapter 12, "Retirement Plans"; Chapter 15, "Investment Approaches And Philosophy"; and Chapter 19, "A Second Act: Starting A New Venture." He also contributed to the firm’s book The High Achiever’s Guide To Wealth.