The Fine Art of Refinancing Your Mortgage

Tired of high mortgage payments?

You may not be stuck with them.

Refinancing your home with a lower-cost loan can bring down the monthly payments and save tens, even hundreds of thousands of dollars over the life of the mortgage.

Janet Krolman finds refinancing so advantageous she's done it five times in the last two years.

As a vice president at a firm that writes mortgages for commercial property near Boston, she tracks mortgage rates closely. And when she sees a sizable drop, she picks up the phone and calls her mortgage broker.

"He must be really tired of hearing from us," she says.

People refinance for a variety of reasons, but it generally boils down to one thing: saving money - usually with lower interest rates.

Timing is crucial. While rates have trended down this year, they popped up in midsummer.

Many economists expect rates on 30-year fixed mortgages to drop further in the next year to about 6.5 percent (paying about two points up front). A two-point loan in Philadelphia now goes for 7 percent, by comparison.

A point is a one time fee equaling 1 percent of the mortgage. Generally, the more points you pay, the lower the mortgage rate. One point will reduce the rate on a 30-year, fixed-rate mortgage by one quarter of a percentage point.

Robert Eggert, president and chief economist at Eggert Financial in Sedona, Ariz., says foreign competition will keep inflation low and the economy will "continue to slow some, so [the Federal Reserve] won't raise rates."

If he's right, this may be a good time to be on the lookout for better rates.

Refinancing can work for all kinds of homeowners, not just those paying high interest rates.

Stephen Powers, director of underwriting and applications at BankBoston, cites three other primary reasons people refinance:

* To convert an adjustable-rate mortgage to a fixed-rate when their adjustable rates start to rise.

* To convert a longer-term (usually 30-year) note into one with a shorter term and better interest rate. That builds equity in the house faster.

* To take cash out, often from a home that increased in value - in other words convert home equity into cash by refinancing with a bigger mortgage.

For example, if a couple bought a home in January 1995 with a $115,000, 30-year fixed-rate mortgage of 9.5 percent, their monthly payments work out to $967.15.

If they refinance now with a 15-year, fixed-rate mortgage at 7.55 percent, their payments went up to $1,060.04. But over the life of the loan, they save $157,367.

If this same couple had stayed with a 30-year, fixed-rate mortgage but refinanced at a lower rate, 7.5 percent, their payments would have dropped to about $823 a month.

Refinancing can also lower your monthly payments by eliminating insurance premiums. If you put less than 20 percent down when you bought your home, you're probably paying private mortgage insurance. But if your equity has reached 20 percent, either because your home is worth more or you've paid down the loan, you can eliminate those payments by refinancing.

Analysts expect a rise in refinancing over the next year or two as a wave of first-time homebuyers, who bought in 1992 and '93 with adjustable-rate mortgages, convert to fixed rates.

Adjustable-rate mortgages (ARMs) do what their name says. They adjust, or change, as rates in the financial markets change.

Lenders generally offer a low, introductory rate that lasts for the first few months or years, but then the rate, and monthly payment, can start climbing.

The experts usually recommend ARMs to people who plan to sell their homes in five years or think rates will continue falling.

Three basic types of loans are generally used in refinancing, Powers says: 30-year and 15-year fixed-rate mortgages and ARMs.

Borrowers can also negotiate their own terms - 20 years, 25 years, etc. Usually 15-year notes offer significantly lower rates than 20 to 30 year loans, Powers says, making them popular for refinancing.

Ms. Krolman signed up for mortgages with no points and no closing costs. That way, she says it pays to refinance every time mortgage rates drop more than 0.2 percentage point.

On her most recent refinance, she never even made the first payment on the initial loan. "That was my goal," she says. "Rates had come down, and they were charging me too much."

Usually, however, borrowers pay closing costs every time they refinance. So follow this rule of thumb, says Eric Belsky at Harvard's Joint Center for Housing Studies: Refinance if rates drop two percentage points or more.

Closing costs include fees for lawyers, application, government record-keeping, title search and insurance, and more.

They can add up to thousands of dollars and can vary widely among lenders. So be sure to get a detailed list of closing costs fora typical loan before you apply. The lender is required to detail closing costs after you apply, but by then you've already paid hundreds of dollars for the application fee and appraisal.

You have to weigh the closing costs against how long you plan to stay in the house to see if lower interest rates will save you money.

The key is to take advantage of good rates when they appear, says Steve Cochran of Regional Financial Associates in Philadelphia.

That's Krolman's approach.

"It's magic," she says. "You just [refinance your house] and it puts money in your pocket."

Browse the web for a loan

You can shop for computers, cars, and stocks on the Internet, so why not mortgages, too?

Here's a sampling.

* Financenter helps with budgets, car loans, credit cards, and mortgages. Stop here first. www.financenter.com

* Mortgage Market Information Services lists loan providers and their rates by state. www.interest.com

* Best Rate gives you direct links to mortgage providers and their rates, as well as general mortgage information. But it doesn't compare rates side by side. www.bestrate.com

* Mortgage-Net offers tips for borrowers and references to lenders, but no rate listing. www.mortgage-net.com

* National Financial Services Network offers the HomeLoan Marketplace, with links to mortgage applications at a variety of banks, plus a loan calculator. www.nfsn.com/HomeLoan.htm

* eMortgages is a mortgage broker, offering mortgages from several providers. The site lists rates, and you can fill out an application online. www.emortgages.com

* Countrywide, a mortgage lender, has a colorful site with rates and an online application process. www.countrywide.com

* Fannie Mae and Freddie Mac offer loads of information about mortgages - but not rates. www.fanniemae.com and www.freddiemac.com