Low interest rates make refinancing an alluring option

When the Federal Reserve Board lowers interest rates, it's marked by headlines and commentary from economic pundits from the mass media.

It's been said that fewer than .2 percent of Americans know exactly how the nation's central banking system does this. The process is both complicated and obscure, involving strategic tinkering of a multi-billion- dollar portfolio of government securities and system of bank-to-bank loans that are far removed from the butter-and-eggs equations of consumer economics.

But what is clear to most people, at least those making payments on a mortgage, is that a dip in interest rates is something to take advantage of. And when news of low-interest rates make headlines, phones start ringing at local lenders.

"Low-interest rates always bring calls in," said loan officer Bill Kendig of Premier Mortgage in Wasilla. "Yesterday we were offering 7 percent on a 30-year fixed." Kendig has six years as a loan officer and sold real estate in the Valley for five years prior to that. He said interest rates now are some of the lowest he's seen.

That 30-year fixed-rate mortgage is useful for a person buying a home, but when people who are already in a home at 9 percent hear about it, they want in, too. Kendig and his competitors at banks and credit unions have a variety of tools at their disposal to help.

"We can go back through our clients and offer streamlined refinancing to them," Kendig said.

So-called streamlined refinancing can bring interest rates down with a minimum of fees. That's because the customer doesn't switch loan institutions, but simply signs for a new loan on the same property with the same lender.

Fees for things such as surveying, appraising, and even credit approval are done away with -- a good deal for someone who is in good standing with their current lender. But most refinancing involves fees which could run into thousands of dollars, and consumers who shop around can pit various lenders against each other in a bidding war.

How does a person know when to initiate refinancing? One good rule of thumb is that if a homeowner is paying more than 2 percent above the going rate for new loans, further investigation is in order. Many lenders are prone to sending a card inviting clients to refinance, and some will actually call. However, the pros say, homeowners should be careful to do their homework -- the 2-percent rule isn't perfect. The monthly mortgage payment is just one factor.

Calculations should also be made to determine the "break-even point." The break-even point is a specific time in the future after which the total savings from the lower interest rate will surpass the amount paid out in fees at the initiation of the new loan. For example, if the interest rate saves you $100 per month and the fees total $1,000, then the break-even point is after 10 months.

"The first question on a refinance is, 'What is my break-even point?' because there are going to be costs associated with refinancing," said Al Strawn, general manager of Matanuska Valley Federal Credit Union. "That would be a timing thing. . . Everybody needs to do that kind of calculation."

Strawn said most reputable lenders can help out by providing fee schedules for individual loan plans and assistance in working out what month in the future the borrower breaks even and starts benefiting from the new interest rate. The flip side of the break-even point is the question, 'How long do I plan to live here?' -- No one can help you with that.

Strawn said it's common for MVFCU and other lenders to contact existing clients when interest rates dip. Offers for streamlined refinancing are common, as well as low-interest home improvement loans, which pay off in under a dozen years.

"That's not just a service, but a defensive measure for the financial institution," he said. Strawn said deregulation has made it easier for consumers to refinance by increasing competition.

"There's a lot of choices of where to get those loans. It's a buyer's market, particularly for people who have good credit," he said.

Which presents the refinance-minded mortgage holder with a situation unheard of 20 years ago. In addition to a card from their current lender, a homeowner might be receiving phone calls, letters, and e-mail in a flood -- similar to the increasingly frequent credit card offers that are often flipped into the nearest waste bin.

Sue Benedetti, vice president in charge of mortgage loans at First National Bank, said wise consumers are cautious consumers when it comes to refinancing.

"People should know who they're doing business with and shop around," Benedetti said. She said an offer that doesn't include a detailed fee schedule may not be all it's cracked up to be, and even if it is, it might not be the best offer available. The names of the different fees may change from one loan to another, or from one institution to another, but Benedetti said the part that matters most is a pretty easy read. "You get a good-faith estimate, and when you compare those, it's pretty easy to see what the bottom line is," she said.