Thursday, January 22, 1998

This is great time to refinance mortgage

By Jeff Brown / Knight Ridder Newspapers

It's time -- time to buy that first home, time to move up to a bigger one, time to refinance that high-interest mortgage that's chewing up your budget.

Thanks to low inflation, the turmoil in Asia and some recent comments by Federal Reserve Chairman Alan Greenspan, the interest rate on the standard 30-year, fixed-rate mortgage fell to a two-year low early this month, with different surveys reporting average rates of 6.94 percent to 7.26 percent.

For a little perspective, note that this isn't far above the low of 6.74 percent hit in 1993 -- which was the lowest rate in 25 years. If you've always wished to have the low-interest mortgage enjoyed by your parents, now's your chance.

Low inflation has been helping to nudge mortgage rates down since early in 1995. And in the last few months the financial problems in Asia have led international investors to flee to the safety of U.S. Treasury bonds, which are the benchmarks for most interest rates in the United States. When demand for bonds rises, bond prices go up and yields -- the interest rates paid by the bonds -- go down, dragging mortgage rates with them.

Then, finally, Greenspan started talking about the threat of deflation, or falling prices, that hurt property owners and businesses. Some traders interpreted that to mean the Fed may push interest rates even lower, causing another downward nudge on bond yields and pulling mortgage rates down another notch.

The decline in interest, which began in April when the average 30-year mortgage was at about 8.27 percent, already has stirred up the housing market.

So what should you do?

First, don't procrastinate. While most analysts expect interest rates to stay low, and possibly fall further, you can never be sure. And though the hunt for ever-lower rates can be emotionally satisfying, like catching the biggest fish or getting the lowest golf score, most people really won't save much by holding out for another quarter-point drop.

Indeed, the monthly principal and interest payment on a 30-year, $100,000 mortgage would drop by only $16 if the rate fell from 7 percent to 6.75 percent.

You could, however, enjoy a tidy savings by refinancing an older mortgage charging, say, 8.25 percent with a new one at 7 percent. You'd save $86 per month, or $1,032 per year, on a $100,000 mortgage. Refinancing makes sense if you'll own the house long enough for the cumulative monthly savings to pay off the cost of refinancing, which is generally in the realm of 5 percent of the mortgage amount. You can reduce refinancing costs by obtaining a loan that does not charge points -- up-front payments. You pay a slightly higher interest rate on a zero-point loan but can still get one in the neighborhood of 7 percent by shopping around.

The drop in rates is also good for sellers. Now there are more qualified buyers for a house at a given price. Surveys also show consumer confidence is soaring and workers are feeling more secure in their jobs, which also should make people more interested in buying homes.

Rates also have dropped on the 15-year fixed-rate mortgage. By taking out a 15-year mortgage, you can get a rate about three-tenths of a percentage point below that charged on a 30-year mortgage. But, because of the shorter term, you pay more each month in principal. Over the life of the loan, a 15-year mortgage can save you a fortune in interest payments, and these loans are a good deal if you can afford the higher monthly payment.

Alternatively, you can simply make extra principal payments on a 30-year mortgage. You won't get the lowest possible rate you would on a 15-year mortgage, but you'll still save a bundle on interest, and you can pass up the extra principal payments whenever money is tight.

As I've mentioned in a previous column, the current rates on adjustable-rate mortgages aren't very attractive, having dropped by less than the 30- and 15-year rates have. First-year rates average about 5.7 percent, down just a tad from the 6 percent of last April -- and compared to just over 4 percent in 1993.

With an adjustable, you'd have lower payments than with a fixed mortgage for the first year. But after that, the rate could well go higher than you'd pay on a fixed-rate mortgage, since adjustables are keyed to the unpredictable movements of short-term bonds.

No doubt about it, now is the time to lock into a low, long-term rate with a 15-or 30-year fixed-rate mortgage.

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(Jeff Brown is a business columnist for The Philadelphia Inquirer.)

(c) 1998, The Philadelphia Inquirer.

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