Seeing as how I lost $50,000 on my first home, no one mistakes me for Donald Trump. But I'm still looking for ways to exact my revenge on the housing market. So the recent plunge in long-term interest rates got me wondering: How might I exploit the trend?
There are a lot of people who, like me, are interested in the prospect of cutting their mortgage rate. Trouble is, there are countless new wrinkles in refinancing. "The marketplace has gotten very, very complicated," says Keith Gumbinger, vice-president of HSH Associates, a Butler (N.J.) mortgage adviser. Besides adjustable-rate mortgages, there are 15- and 10-year fixed-rate loans; "reset" loans, on which the rate is adjusted after, say, seven years; and "no-cost" loans, which hike your rate a tad so that you spend next to no cash up front. A variant is the "negative-point" mortgage, where a lender gives you a rebate on some closing costs--in return for a rate that's higher still.
BLOW BY BLOW. What's right for you depends on a slew of factors. Among them are how long you intend to keep the loan, how high your tax rate is, and what you might be able to earn by investing what you would have to spend on closing costs and points. (A point, a fee that the lender collects, is 1% of the loan amount.)
To sort some of this out, I decided to act as my own mortgage broker. The challenge was to refinance my 30-year, 8.13% fixed-rate loan at the lowest possible cost. Here's a record of my adventures:
Day One, 9:58 a.m.: I reach Larry, the mortgage guy at the bank handling my current loan. He quotes me 7.5% with no points for a 30-year loan. On a loan like mine, that's a monthly saving of about $50. I tell Larry that I had hoped for better. He starts riffing on the Federal Reserve, Alan Greenspan, and the yield curve. I'm about to hang up when Larry recalls: "I have seen 7 1/4 on one rate sheet." Really? "That's doable." He'll fax a "good-faith estimate" of terms and closing costs.
11:25 a.m.: I try unsuccessfully to reach Jeannie, my credit-union mortgage officer.
11:30 a.m.: Larry's fax arrives. He estimates closing costs of $1,475--and, for a 30-year loan, a 7.5% rate, not the 7.25% he mentioned. It may be that the rates haven't fallen enough to make refinancing at 30 years worthwhile. But Larry also quotes me 7.13% for a 15-year loan, raising a fresh question: What if I refinance at 15 years instead of 30?
11:31 a.m.: I fire up my computer's personal-finance program, which has a built-in calculator to solve just such problems. It tells me that if I lay out $150 a month extra to pay off the mortgage in 15 years, then the savings will be huge--$90,220.
11:46 a.m.: Intent on finding the best 15-year rate, I recall that a New York bank has a mortgage office nearby. Bob, the branch manager, quotes me 7.25% for a 15-year, no-points loan. That's one-eighth of a percentage point more than Larry's 7.13%. Yet Bob is scornful: "7 1/8 sounds out of the ballpark," he says. But the closing costs aren't bad: $1,233.
Day Two, 10 a.m.: At last, I reach Jeannie at the credit union. Its rate, 7.5%, no points for 15 years, is worse still. She seems unconcerned about losing my business, so I ask her for a little insight into closing costs. How does $1,200 to $1,500 sound? "Extremely low," Jeannie says. "I have to think they just kinda lowballed you."
She estimates $1,800 to $2,000, including a bunch of little items such as the "tax service fee" ($75 for sending a tax payment to the state). Where am I likely to get my best deal? From the bank that is handling my current loan, Jeannie tells me--since it already holds much of the paperwork. "All they need is a completed loan application," she says, "and they should be able to run with it." (When I spoke again with Gumbinger at HSH Associates, he agreed, noting that if you make timely payments, the bank may trim appraisal or other fees.)
11:08 a.m.: I head for the Internet, where many lenders post rates. By searching for "mortgage refinance," I find scores of sites, including one for a lender in Orlando, not far from my Florida home. Its 15-year rate: 7%, no points. I send an E-mail message asking for closing costs.
11:11 a.m.: Elsewhere on the Web, I seek facts and advice. There's plenty (table), including a section of HSH's site with a detailed national survey of closing costs. With that, I feel confident I won't get ripped off. I also find my way to the Manhattan Mortgage Co.'s page, which shows how the metro New York market is faring, with its peculiarities of many cooperative apartments and jumbo ($214,600-plus) mortgages. No-point, 30-year jumbos recently were going for 7.63%, a quarter-point over the 7.38% rate for smaller 30-year mortgages. For 15-year jumbos: 7% with no points, same as for the smaller loans.
Day Three, 11:51 a.m.: The Orlando lender faxes me an estimate of closing costs on the 7%, no-point loan that looked so enticing on the Internet. They come to $2,071, or $596 more than Larry's. That's equivalent to adding three-sixteenths of a point to the interest rate--making it 7.19%, about halfway between Larry and Bob.
1 p.m.: I need quotes specific to my situation, plus a powerful calculator to crunch the many permutations. I go back on the Internet and find Quicken's free site devoted to mortgages. After I fill out a password-protected questionnaire to guard my confidentiality, QuickenMortgage surveys six participating national lenders--including Chase Manhattan and Countrywide Home Loans--for loans tailored to my needs. The site is maddeningly slow. But I get eight quotes, including 6.25% on a 15-year loan (with three points) from a unit of Principal Financial Group in Des Moines.
3:02 p.m.: Ron Insana, CNBC's early-afternoon host, is excited. The 30-year Treasury bond yield has sunk to 6.03%, the lowest level this year. I dial Principal but hang up before the call connects, wondering if paying three points is stupid. I still need to figure out what the tax implications are and how much I lose by spending instead of investing my cash. For example, I would generally have to amortize points on a refinancing over the life of the loan. (I could deduct part of the points immediately if I used some of the proceeds for home improvement.)
3:04 p.m.: Online again, I begin a search that eventually takes me to SmartCalc Financial Calculators. Another free site, it boasts 107 interactive calculators that answer queries on home finance, auto loans, investing, and more.
6 p.m.: After working through several possibilities with SmartCalc's "Which Loan Is Better?" and "Am I Better Off Refinancing?" worksheets, I find an answer, in bright red on my computer screen. I can save as much as $12,103 (after adjusting for estimated future inflation) in today's dollars by refinancing for 15 years at 6.25% with three points.
Day Four, 9:54 a.m.: I call Larry at my bank and tell him about the 6.25% loan. "I don't know how they're doing it," he says, noting that his rule of thumb is one point up front takes one-eighth point off the interest rate. He agrees to recheck.
10:15 a.m.: I call Principal and ask for an application for a loan.
10:19 a.m.: Phone rings. "Hi. It's Larry. I was wrong." He tells me that an extra point up front will cut my loan rate one-quarter of a percentage point.
11:02 a.m.: A Principal representative calls and tells me it charges a $400 origination fee. With other closing costs, its loan is actually about the same price as Larry's.
11:30 a.m.: I've got some good quotes--6.25%, three points, or 7.13%, no points--both below what mortgage brokers have offered me. I resolve to use Principal's quote to hammer Larry on closing costs. SmartCalc's worksheet tells me that if I keep a 15-year mortgage for 10 years, the three-point loan would save me $7,292, vs. $5,967 with no points. But if I hold it five years, the no-point loan would win, $2,085 to $1,889.
My wife and I are still debating which loan we should choose. We may even decide to wait and see whether rates move any lower. Whatever the case, we could be on our way toward saving thousands--and getting something back from the housing market.