November 11, 2006

Changing to fixed rate can shrink payments, end expanding loan

By Liz Garone
Special to Valley Homes

With offers like "lower your monthly payments" and "reduce your high interest rates," ads for home refinancing are everywhere. It would be hard for homeowners not to be wooed into thinking that now might be a good time to refinance. But it doesn't make sense for everyone, according to local mortgage professionals.

"Every single loan and situation is different," says Pam Timmermeyer, a senior loan consultant with Washington Mutual Home Loan Center who has close to 30 years in the field. "Refinancing could be a lot more expensive for some people than they realize," she says. "I send people away all of the time if it doesn't make sense for them."

On the other side, Timmermeyer has also helped a lot of people save quite a bit of money by refinancing. "It really is a case-by-case situation," she says. "What people need to do is call a loan officer and find out what their options are."

There is one group of people who should make that call sooner rather than later: borrowers with Option ARM loans. These loans offer the borrower the option to pay less than the interest each month and have allowed a lot of people who might otherwise have been priced out to get into the housing market.

In the short term, the loans seem great if available cash is low. But, in the longer term, they can be a "time bomb" waiting to happen, according to Paul Carrollton, president of Carrollton Mortgage. Initially, the principal of the loan rises at a fairly steady rate, but when the rate goes up, so do the monthly payments, and the principal can rise precipitously. "They are going to explode on people who have them," Carrollton says. "There are a lot of people out there who are not savvy to how the adjustments work."

Carrollton had an 80-year-old man call him recently looking to get out of his loan and into something better. The man had been "lured" into a loan with what was billed as one percent, according to Carrollton. "After three months, the balance was skyrocketing," he says, and the man didn't know what to do.

Another woman who called Carrollton had gone into a program where she only had to pay $1,088 per month for the first year. What she failed to realize was that by only making the lower payment, her balance was increasing by $1,000 a month. While Carrollton would have liked to move her out of the program and into a fixed-rate loan, he couldn't; her loan came with a prepayment penalty, a common fixture in today's market.

In order to negotiate a slightly lower interest rate, many borrowers agree to loans that come with penalties for paying them off early. The amounts can be quite high, sometimes upwards of four percent of the borrowed amount, and will usually wipe out any potential savings that would be earned by refinancing. The easiest way to find out if a loan has a prepayment penalty is to call the customer service number on the monthly statement, Timmermeyer says.

If it turns out that there is a prepayment penalty, find out the date it ends, says Carrollton. In California, the time limit for prepayment penalties is three years for owner-occupied homes. "Start the process 60 days before the prepayment penalty period is over," Carrollton says. "The day it's over, call your loan officer so you can close on your new loan."

For those people who don't have prepayment penalties and are simply looking to lower their rates, now could be a very good time to refinance, say both Timmermeyer and Carrollton. But, you need to take into consideration the fees for refinancing, which will probably run a few thousand dollars.

If you can make all of your money back from your costs in 12 to 18 months, then it is most likely worth it, says Timmermeyer. "Ask the loan officer for a good faith estimate. You need to be comfortable with the details of the loan. The officer should explain it to you," she says.

For Carrollton, today's low rates are well worth making the move. "I would encourage everyone to get a fixed rate as soon as possible," he says, around six percent. "Year in and year out, that is going to be a wonderful loan for you." Carrollton should know; when he got into the business in 1981, rates were running 15 percent. "Six percent is very affordable. This is just a great rate," he says.

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