Shop around for mortgage offers

By Ron Allen

With mortgage rates dipping in early 2001 toward their lowest point in 18 months, debating a refinance becomes more than a spectator sport. Suddenly, refinancing the mortgage becomes a dash to net monthly savings — a boon few other financing moves can deliver.

But hold on. Before you jump off the starting blocks to take advantage of lower rates, it’s important to review your needs as well as the market’s mortgage options. Mortgage offers may look alike, but they don’t necessarily work or cost the same.

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When rates are as low as they are now, it may seem an easy assumption that mortgage products are commodities, with one just like another. Still, smart consumers should weigh several factors when they select a lender or broker, as well as the nuts and bolts of the mortgage product itself.

Here are some tips for making the most of refinancing your home when rates are low:

* Assess your goals first. Take a moment to define how a refinance should benefit your personal goals, because the fit is an individual one. If you know you and your family will be moving to a larger home in three years, your fit is different from that of a family already living in the house of its dreams. Check your cash flow, other loan obligations and savings needs — as well as your tax situation — alongside your financial and personal plans. A refinanced mortgage can help you reach a range of objectives either by freeing up cash flow or building equity faster, depending on the terms you select.

* Forget the rules. The long-standing rule of thumb says refinancing makes sense when the new interest rate is 2 percent less than that of your existing mortgage. And, yes, the 2 percent rule could give you the green light. But look beyond the rule to see if the cost of the new loan will be offset by after-tax savings over the first 24 months. If so, and you plan to be in your home for at least that amount of time, think about making the switch. But don’t stop there. If these general guidelines don’t apply, there still might be good reason to consider refinancing. You might be planning to take cash out of your home’s equity to reduce more costly credit card debt, or to fund a remodeling project. In either scenario, even a half point reduction in your mortgage rate can make it more attractive to refinance now.

* Look beyond the lowest rate. In the end, a 7 percent mortgage from one lender may be more expensive than a 7.5 percent mortgage from another. The difference may be additional fees, either points paid at closing and based on a percentage of the mortgage or a long list of charges such as document preparation fees, underwriting charges, processing fees and so forth. To make the best pricing decision, compare total costs, including all applicable fees; points, if any, to be paid; and interest costs over the life of the loan.

* Look for flexibility by locking in a loan rate that might even go down. Some banks go one better by giving you the option of a one-time rate decrease should rates go down anytime during your lock-in period. This best of both worlds option is a tremendous way to protect yourself from rate increases, while still allowing for some benefit should rates fall.

* To roll or not to roll. In general, you can pay for closing costs or roll them into the loan itself. A loan with the lowest possible interest rate — perhaps the best strategy during a long period of owning your home — is likely to require that you pay some up-front closing costs or out-of-pocket expenses. On the other hand, a “no cost” loan with a slightly higher interest rate might have no up-front expenses and instead rolls them into the amount you are financing. Your choice depends in part on whether you plan to stay in your home or envision a move within a few years. Closing costs are an expense it takes several years to recoup — so if you are planning on being in your home for only a short time, consider a “no cost” loan.

* Consider shortened terms. Ideal for those who want to build equity quickly, 15-year mortgages save sizable interest payments during the duration of the loan. You may also want to consider biweekly mortgage payments, which also speed equity growth.

* Refinance locally. Local accountability can make a difference in how smoothly your refinance starts and finishes. When all goes well, a loan by telephone or website might be fine. Should there be a problem, it’s nice to be able to connect with an individual who can help resolve issues on the spot.

Done right, refinancing your home is a tremendous tool to help meet your goals, whether they include short-term savings on monthly payments or long-term cost-cutting by paying off your home more quickly. With a helpful, reputable lender, the dash to refinance can be a big step toward your financial goals. Ron Allen is president of Vectra Mortgage Group, a division of Vectra Bank Colorado, which operates more than 50 locations and employs more than 900 people throughout the state. Vectra Bank Colorado is the state’s fifth largest bank with total assets exceeding $2.2 billion.