Home owners across the country are swamping lenders with ``refi' applications, hoping to dump their double-digit mortgage rates. But loan analysts say some of the eager applicants haven't done their math, and could actually spend more than they save when refinancing their current mortgage.
That's the view of experts like Keith Gumbinger, whose firm HSH Associates monitors the mortgage-rate quotes of over 2,000 lenders nationwide. Although refinancing volume is booming, he says, even lenders taking the applications concede that some of the borrowers banging on their doors are ill-advised.``When you read that rates are the lowest they've been in four years,' says Gumbinger, ``naturally you get excited about the possibility of lowering your monthly payments.'
But does it really make sense for everyone with a 10 percent adjustable to switch into a fixed rate in the 8 7/8 to 9 percent range? Is it axiomatic that if you pass the ``2-percentage-point cut in your rate' test you should run out and refinance?
The answers to both questions, according to Gumbinger and other mortgage specialists, are no. Throw out the old, easy rules-of-thumb on refinancing, they advise. That's because the sheer variety of loan alternatives now available to most refinancers require every home owner to do his or her own math.
``You've simply got to tote up all the costs - and the projected savings - for each loan package' before you can say conclusively that a refinancing makes sense for your situation, according to Gumbinger.
Here's a three-step formula to help you cut through the confusion.
First, you have to ask yourself: How long are we going to be in this house? Another five years? Ten years? Or is there a good chance we'll be transferred, change jobs or have to move in just a few years?
Your answer here is critical. That's because the longer you stay where you are, the better your chance for paying off the costs of refinancing, and saving money on the deal.
Say you'll save $80 a month on your mortgage payment by refinancing into a lower rate. That's great. But what if the transaction costs are $3,000? It'll take you more than three years just to break even on the deal. If you move or pay off the loan before that point, refinancing will actually cost you money out of pocket.
The second key consideration: As you comparison shop lenders in your community, focus closely on the costs of refinancing for different mortgage packages. Some lenders' rates are the lowest in town, but their fees, processing charges and points mount up to the highest. Every point added to the deal means an extra one percent of the mortgage amount tacked onto your costs. Three points on a $150,000 ``refi' mean $4,500.
Among the other variable refinancing fees you need to ask about everywhere you shop:
Application and underwriting fees. Some lenders don't charge for these at all. Others will hit you for a standard, nonrefundable $150 to $400 at application, $150 at closing for underwriting.
Attorneys fees. These are for the bank's attorney, not yours. They can range from $150 to $500.
Title search and insurance vary according to the size of the loan and the lender's coverage requirements. Figure on a range of $250 to $600.
Mortgage taxes. These can be a shocker. The amounts depend upon the state or municipality where the property is located. Some jurisdictions hit you for up to two percent of the loan amount-$2,000 of mortgage tax on a $100,000 refinancing of your own house. In other areas, there's little or no tax, other than $50 to $75 for recordation.
Other ``nickel-and-dime' items that add up: These include mandatory surveys ($75 and up), appraisals ($200 or more), separate ``closing' or document-preparation charges, tax-service fees, ``lender's inspection' fees, credit checks, ``intangibles' taxes, notary fees, and a long list of others.
The third step is to shop your local market intensively to find the loan package that puts you past ``break even' the soonest. Among the most attractive refi options for many families at the moment are the fixed-rate ``two-step' loans currently in the mid-to-upper 8 percent range. They provide a fixed rate for five to seven years, followed by a one-time rate re-set (to the then-prevailing rate) for another 23 to 25 years. Many competitive lenders offer this with low point options.
What about refinancing into an adjustable rate mortgage (ARM) with a first-year rate in the mid-to-upper 6 percent range and a capped maximum rate of 8 1/2 percent in the second year? If you plan a stay of three to four years in the property, the deeply discounted costs for the first two years can save you big money.
But when fixed-rate alternatives are in the 8's, it's harder than ever to justify signing up for an unpredictable ARM for the long haul.
(If you want help doing your math, HSH Associates will send you its ``Refi Kit' for $3, covering postage and handling. Mail to HSH, 1200 Route 23, Butler, N.J. 07045.)
Kenneth R. Harney is president of the Harney Corp., a publishing and consulting firm based in Bethesda, Md.