Holden Lewis is a senior reporter at Bankrate.com. His blog, Mortgage Matters, discusses how economic and political developments affect mortgage rates and real estate. He joined Bankrate.com in 1999, after working for the Associated Press and The Blade in Toledo, Ohio. He chatted about mortgages on Thursday, Jan. 24.
Holden_Lewis: Hi, everyone. Away we go.
Boston_com_Moderator: Good afternoon and thanks for joining us. In light of falling mortgage rates, we've invited Holden Lewis, a senior reporter at Bankrate.com, to take your mortgage questions. Welcome, Holden.
jim__Guest_: I am currently paying 6.875 percent for a 30 yr fixed mortgage. Should I see if I can refinance to get a lower rate?
Holden_Lewis: All other things being equal, the answer is yes. With some of the other questions in the queue, I'll explain what I mean by "all other things being equal."
Holden_Lewis: Right now, if you have good credit, and equity in the house, and you're getting a loan for less than $417,000, you can get a rate below 6 percent.
JP__Guest_: I have $250,000 left on a fixed (6.25% and no pts) mortgage which I'm considering to refinance in oder to lower my month payments. At what rate does it financially make sense to do so?
Holden_Lewis: The answer depends upon how long you plan to live in the house. Here's how you do the math:
Holden_Lewis: Find a mortgage calculator -- either one on the Web, like on Bankrate.com, or a live one in the form of a mortgage broker or loan officer. Get an estimate of what your rate is likely to be, and how much lower your monthly payments will be. Get an estimate of your closing costs. Divide those closing costs by the monthly savings. The answer tells you your break-even point.
Holden_Lewis: For example, let's say you would save $100 a month by refinancing, and the closing costs would be $4,800. Your break-even point is 48 months from now. If you expect to still be living in the house more than four years from now, it makes sense to refinance. If you think you'll sell the house before then, it's probably best to sit tight with the mortgage you have.
g__Guest_: Over the next 30-60 days we looking at higher or lower mortage rates(30 yr fixed)? What' s your guess
Holden_Lewis: My guess is that the rates will be higher. One resource to use is Bankrate's Rate Trend Index, in which mortgage bankers and brokers are asked every week what they expect to happen to mortgage rates over the next 35 to 45 days. It's at http://www.bankrate.com/rti.
Holden_Lewis: We can predict that rates will go up, down, or remain about the same. I'm batting about .340 in the last year -- basically, close to what you'd get by throwing at a dartboard. So take the RTI with a grain of salt.
Jim__Guest_: G'Morning. My 5 year 4.9% ARM runs out in March 2010. would i be foolish to refi now while rates are low and lock in 10 or 15 years? thanks.
Holden_Lewis: That depends on a mind-numbing number of factors. I'll run down a few.
Holden_Lewis: In your situation, the first thing I would do is sit down and really think about my situation: What do I plan to do two years from now, and what do I think I'll be able to do.
Holden_Lewis: For example, if you plan to move sometime in 2010, refinancing probably isn't worth the expense. But what's happening to prices in the neighborhood? Do you expect to be able to sell when you want to?
Holden_Lewis: In other words, maybe you plan to move within a few months of rate reset. You have to weigh the possibility that your plans will be dashed by a poor housing market.
Holden_Lewis: If you plan to refinance shortly before or after rate reset, you've got to consider whether you'll be able to do that. If you'll have less than 5 percent equity, or you fear that your credit won't be very good, you might not be able to refinance two years from now.
Holden_Lewis: OK, let's assume that you plan to live in the house for several more years, and you expect to have an adequate equity cushion to enable you to refi in 2010. Then you should get an estimate of the closing costs of refinancing now. Are you willing to pay those costs, plus the higher monthly payments over the next 26 months, for the security of having a fixed rate? That's a judgment call. Different people would answer it differently, and they all might be right. Basically, which scenario helps you sleep better at night?
Rob__Guest_: Hi Holden, I purchases a home back in June (07) and I am in a 30yr fixed @ 6 3/8%, I am comortable with my payment where it is but would love to go from a 30yr to a 20yr, seems like 30yr fixed rates have come down about a point from where I am now, what are the spreads these days between a 30yr mtg vs, a 20yr and where would I roughly need to be to be able to accomplish the term reduction? Its aabout a 270k loan balance. Thank you!
Holden_Lewis: Rob, I don't think you'll get a lower rate by specifying a 20-year loan. If you want to pay it off over 20 years, lenders will give you a loan with a 30-year rate, and they'll tell you how much to pay every month to amortize it over 20 years. You probably can do better (if you're creditworthy and you have sufficient equity) on a rate right now -- i.e., you can refinance to a 30-year fixed, get the lower rate, and then pay it off over 20 years.
Holden_Lewis: This is an option that everyone has, by the way. Let's say you got a 30-year fixed three years ago, and you want to refinance now, but still pay off the loan 27 years from now. Just go to an amortization calculator and find out how much principal and interest you need to pay every month to pay it off in 27 years. Add your taxes and insurance to that and presto.
gradmanmaine__Guest_: Holden, I became a first time home buyer in October '07. I got a fixed mortgage @ 6.625%. My rate is down to 5.99%. The cost to refinance is $750. Ironically, it was $600 until the rate cuts and the banks wanted to make more money off the refinances so jacked the refinance the allonge rate. Is there a rule of thumb of when to refinance? A refiance now saves me $130/ month. Your thoughts?
Holden_Lewis: Congrats on the new house and I hope you're not sick and tired of shoveling snow. If you can save $130 a month by shelling out $750 now, you'll break even in, what, six months? What are you waiting for? Get off the computer and go refi now.
refi__Guest_: With the Fed's rate cut, where should we see a 30 year fixed with no points head to?
Holden_Lewis: Long-term mortgage rates, like the 30-year fixed, don't respond directly to the Fed's short-term rate moves. In fact, the 30-year fixed sometimes rises in response to a Fed rate cut. That's because reductions in the federal funds rate are sometimes deemed inflationary.
Holden_Lewis: I've been guessing for a couple of months that the 30-year fixed will rise, simply because it has been so low. I would think that regardless of what the Fed did. Well, actually, if the Fed had stood pat this month, I might have changed my tune, assumed a severe recession, and predicted lower mortgage rates.
Holden_Lewis: Jeez, I hope that's clear.
clueless__Guest_: Currently I have a NINA mortgage for $60k at 7.3%. I would like to refinance and build in extra cash for home improvements. Is this a good idea, and where do I begin?
Holden_Lewis: A NINA loan is a mortgage where the lender doesn't verify your income and assets (no income no assets = NINA).
Holden_Lewis: First of all, don't expect to get a NINA loan this time around. Most lenders are going to insist on verifying income and assets, even if you're self-employed.
Holden_Lewis: Second of all, it might be a little harder to get aproval for a cash-out refinance. They're going to want you to keep a lot of equity, just in case your home's value falls. Why? Because if you default, they want to be able to take the house and sell it for at least as much as you owe.
JAKEANDELLWOOD__Guest_: Is it a good idea to refinance your mortgage from 5.875 to 5.25? I've heard you never want to unless its at least 1 percentage point. Any advice?
Holden_Lewis: I don't want to beat a dead horse here, but I'm going to anyway, because this is an important point. Ignore the old rule of thumb that you shouldn't refi unless you can save at least 1 percentage point on the rate. The thing to do is look at your monthly savings vs. the cost of refinancing, and figure out your break-even point, and determine whether it makes sense for you to do the deal. And remember that you can amortize the loan over whichever period you want. You don't have to start anew with 30 years of payments. Think about when you want to pay off the loan, calculate your monthly payments based on the new rate and the amortization period, and then figure out your breakeven poin.
Person__Guest_: Hi Holden, when re-financing, what typically happens with the equity you have built in your home?
Holden_Lewis: Ideally, you keep all of the equity. In practice, most people pay the closing costs by increasing the size of the loan. Example:
Holden_Lewis: Let's say the house is worth $100,000 and the current mortgage balance is $60,000. You have $40,000 equity.
Holden_Lewis: When refinancing that loan, most people will get a mortgage for, say, $63,000 instead of paying $3,000 in closing costs out of pocket. So they increase their loan balance to $63,000 (but at a lower rate), and decrease their equity to $37,000.
Maldenite__Guest_: I have 3 years left on the fixed rate portion of my ARM at 5.75. I've heard rates are going to be great in the next few months. I want to take advantage and move to a 30yr fixed but I only have about 15% equity in my house. I've always heard 20% as the magic number to avoid PMI. With house prices falling my equity is shrinking by the day. Should I make an agressive push to switch now even though I have 3 years left on the fixed part of my ARM? Maybe even borrow money from family to get to 20%? Is 20% truly the number to avoid PMI? In other words, should I be feeling this desperate?
Holden_Lewis: Oh, man... that one is tough.
Holden_Lewis: If you're truly desperate, I would recommend this: Write a check to an appraiser for probably $300. Ask around to find an honest, experienced and thorough appraiser. And ask this: What is happening to house values in my neighborhood, and what's your best guess as to what the value of my house will be in three years?
Holden_Lewis: You're paying for an appraisal, not an off-the-cuff answer. You really need an informed estimate on how much the casa will be worth in three years, when the ARM resets and you'll want to refinance.
Holden_Lewis: If the appraiser thinks that there's a fairly good chance that you'll have less than 10 percent equity in three years, I think you should seriously consider refinancing now -- because you might not be able to refinance three years from now.
Holden_Lewis: So I want you to shift your thinking away from PMI avoidance and into foreclosure avoidance. PMI is tax-deductible (from federal income taxes, I don't know about state) through the 2010 tax year.
heegs24__Guest_: 7/1 arms any good?
Holden_Lewis: I don't think you're saving much on a 7/1 ARM vs a 30-year fixed.
krocko__Guest_: I have a 30 year fixed rate of 5.875%. I have had it for about 5 years and I have $254,000 remaining to pay off. At what point do I refinance?
Holden_Lewis: Right now you're probably not going to get much better than the rate you have now. You can go ahead and ask a broker or lender if you could save money by refinancing. Listen with a critical ear. Asking a banker whether you need a loan is like asking a barber whether you need a haircut.
Lucky1__Guest_: I am considering re-financing 30 year fixed rate mortgage from 5.875% to 4.875%, wrapping in all my points and closing costs into the final amount I would be borrowing. I would be saving about $164 a month. Is it worth my while to re-finance?
Holden_Lewis: First, compare apples to apples. Let's say you have 25 years left on your current mortgage. Make sure you're calculating your monthly cost savings based on amortizing the new mortgage over 25 years, and not 30 years.
Holden_Lewis: Do that, and if you're saving anywhere near $164 a month, well, that sounds pretty good. Especially if the new loan has a fixed rate. Use the monthly savings to pay off credit card debt.
chins__Guest_: hello. I have a 30 year fixed rate at 5.875. Less than one year into my mortgage (march 1, '07). I currently have an offer for 5.375 to refinance, no points, no closing costs. Should I wait another week or so to see what happens? Or, will I miss the boat if I do that? My guess is rates may go down, not up that quickly. What is your hunch? thx.
Holden_Lewis: If you've been here this entire hour, you've seen my comment about my batting average when it comes to predicting mortgage rates. I think they'll go up in the coming weeks. I'm right one-third of the time. Keep that in mind when I say I think rates are going up, so you should jump on this deal if it's still available.
wadeo__Guest_: I borrowed 100% of my townhomes value in 2005 and used two mortgages. I make I make $25G more now than I did when I got my mortgages and would love to roll both into one 30 fixed. I feel that I was pressured into my mortgage by the boker who sold me on the interest only option. I have little equity. Are my options pretty much waiting this out and pay down principal
Holden_Lewis: I suggest going to another broker or a banker and asking this question. My hunch is that you'll be told that they don't want to refi the loan unless you have more equity. I hate interest-only loans in a housing market where prices are declining or stagnating.
RogerThat__Guest_: Hi -our 30-yr. fixed is currently at 7.25%. Seems like it would make sense to drop almost 2 points. But what sort of costs should we expect to do that, assuming we stay with our current lender? And do we need a lawyer for this? Thanks for any info.
Holden_Lewis: Off the top of my head, I'd guess you're talking anywhere from $2,500 to $6,000 in closing costs. More likely it's at the lower end of that range if you keep the current lender. Your breakeven point is probably pretty quick if you drop the rate by 1.5 or 1.75 percentage points.
Holden_Lewis: As far as needing a lawyer, I'm unfamiliar with Massachusetts law. In some northeastern states (I'm talking about you, New York), lawyers handle loan closings. I don't know about Mass. If you feel insecure about the process, go ahead and shell out a few hundred bucks for a lawyer. Consider it an investment not only in financial protection, but in feeling safe and secure. I've bought two houses in my life and refinanced my primary mortgage once. I wouldn't dream of buying a house without a lawyer's advice, but we refi'd without an attorney. I have a hunch you've been putting off a refi for a long time, so maybe it's worth having the emotional security of hiring an attorney to aid you in your refi.
John__Guest_: Hi, I am considering buying a home which needs a ton of work (close to 140K). Am I better going through a program like Wells Fargo's Purchase and Rehab program or should I purse Hud's 203k program? Any other options? The repairs need to be done immediately after closing. Thanks.
Holden_Lewis: Here is an interesting question that I don't know how to answer. I wish I did. I guess you'll have to rely on the loan salespeople. The Wells loan officer you talk to is a salesperson who will pitch you on the benefits of the Purchase and Rehab program. Same with the loan officer who does FHA products. You'll just have to weigh their pitches. I wish I had a non-lame answer.
mm__Guest_: Hi Holden, Advice please -- Bought last year -- 1st time buyer -- 6.65% -- no points -- should I be looking to redo the loan?
Holden_Lewis: Yes, if the lender will approve you at a lower rate.
rmm30__Guest_: Hello, We are trying to decide if it is worth refi our home. We purchased 11/06 - 2 mtgs... the 1st at 6.125% for 230K and the 2nd at 8% for 30K... should we refi? we are planning to stay at this home - based on mket conditions, 3-4 yrs.
Holden_Lewis: You have a few options. You could roll the two loans together into one. You could refi the first or refi the second or pay off the second as quickly as possible. Or, and here's one that maybe you haven't considered, you can replace the 8 percent second with a home equity line of credit at or close to the prime rate. Don't charge up the HELOC and instead keep making the same payments you were making on the 8 percent second. You'll pay it off faster.
fen__Guest_: I ave 1 year left on a 3.5 % rate arm should I hold out for a lower rate
Holden_Lewis: I think fixed rates will rise from today's low rates. It's tempting to hang onto that 3.5 percent ARM until the bitter end, though.
Holden_Lewis: I won't even begin to guess what will happen to ARM rates in the future. Maybe your question boils down to this: Will you qualify for refinancing a year from now? If you have doubts, maybe you should refi now, just to be safe. I mean, if your place is losing value and you'll be underwater a year from now, refi now. Otherwise ... 3.5 percent for one more year, that's pretty darn tempting. It's like having a year's worth of ice cream in your freezer. Should you eat it every day or forgo it? Decisions, decisions...
Phil__Guest_: Actually, I just thought of a question. With so many larger banks saying that, in reaction to higher delinquencies in their non-retail mortgages, are mortgage brokers having a problem finding lenders for their customers?
Holden_Lewis: Yes. I plan to write about this soon. Lenders are muscling brokers out of the marketplace. I wonder how many mortgage brokers will be in business three years from now.
tzeros__Guest_: I am looking to buy a Boston cond in the summer and would like to know where do I go to look for reputable mortgage companies or banks. Thnak oyu
Holden_Lewis: I'm a paid employee of Bankrate.com, so of course you should go to Bankrate's mortgage rate tables at http://www.bankrate.com/brm/rate/brm_mtgsearch.asp?refi=0
Holden_Lewis: Then there's also the tried and true method of asking friends, family and co-workers for referrals. You probably know a few smart cookies who don't let anyone take advantage of them. Who did they get a loan from? Do they recommend that person?
Holden_Lewis: I don't think you should choose a lender based on a Realtor's recommendation.
Mondski__Guest_: Will lower interest rates keep housing prices high?
Holden_Lewis: Low rates and sloppy underwriting are what led house prices to skyrocket in some markets. But the sloppy underwriting has been taken away, and many cities have tons of empty houses all over the place. Look at Robert Gavin's story from last October about the foreclosure crisis in north Lawrence. Even with low rates, huge inventories of unsold houses should keep prices down.
Holden_Lewis: OK, one more question.
Greyhound_Mom__Guest_: My husband and I bought our house in Western Mass. 3.5 yrs ago with a five-year fixed rate of 4.75. I heard one should wait another 6 months to refinance, is that not the case? I don't want to wait too long if home values are falling. We have no plans to move from here.
Holden_Lewis: If home values are falling, you need to get an educated estimate on how much equity you can expect to have 18 months from now. If you're pretty sure you'll have 20 percent equity, and your credit is good, you should be able to qualify for a new loan. You're caught in a bind here, with 18 months left on an attractive rate. This is a gut call, really. If it was me, I'd probably refi just for the peace of mind. But I'm not you.
Holden_Lewis: All right, all right, just one more. From Joe.
Joe__Guest_: Also, is it a smart idea to do an interest only adjustable if I can invest what would have been the principal in a high yield investment of some kind?
Holden_Lewis: Joe, this is a question that's better put to a financial adviser. I understand what you're asking, and I get a form of your question often. I have a personal bias against that kind of thing, because I'm conservative when it comes to the roof over my head. But there are a lot of gutsy people who are financially more sucessful than me who get ARMs to maximize their cash flow so they can buy high-yield investments. They have courage and I admire them. But I wouldn't emulate them. Maybe you're different.
Holden_Lewis: We've run out of time. Thanks for chatting today!