The do's and don'ts of mortgages and refinancing
With Utah's recovery from the recession outpacing the nation, would-be homebuyers returning to the housing market are stepping into the best interest rate environment in memory.
Rates for 30-year fixed mortgages in Utah have stayed mostly below 3.5 percent since last summer, while 15-year rates have drifted downward to around 2.8 percent, according to Bankrate.com.
Here is a refresher course to help buyers and owners avoid making the wrong decision about a mortgage or refinancing.
There are good and not-so-good lenders • The housing meltdown that started in 2008 was caused in large part by unscrupulous lenders steering people into mortgages they couldn't afford. Chris Bennett, a mortgage consultant with Axiom Financial in Midvale, suggests people should seek recommendations from family, friends or a real estate agent before choosing a lender.
The majority are reputable, Bennett said. But going with a company without doing some research opens the possibility that the borrower will be charged excessive loan origination and closing fees or get stuck with an inflated mortgage rate.
"You want someone who is going to provide the service that you deserve. We give our clients information on all the pieces of the transaction; we make sure they know their interest rate, their payment and the details of the payment on the type of loan that they have," Bennett said.
Mortgage rates are low, but volatile • Yes, you want quotes from several lenders. But choose sooner than later or run the risk of losing the best mortgage rate.
"Over the last week, our interest rates have gone up 0.375 points for a 30-year loan, so you can lose by shopping around too much," Bennett said. "Don't spend two weeks looking. Spend a couple of days and then make a decision."
Think before refinancing to a 15-year loan • Over the past 12 months, the rate for a 15-year loan has slowly fallen, from slightly more than 3 percent to as low as 2.6 percent in January before starting a gradual rise to 2.8 percent today. To many people, rates that low are "free" money.
There is a risk, though, said Tim Roberts, a senior loan officer at Bank of Utah.
"I think people need to be sure they have the means or the ability to pay the 15-year payment. I've helped somebody refinance to a 15-year mortgage [from a 30-year loan], and six months later they came back and said they can't afford it," Roberts said.
True, refinancing to a shorter-term loan will build equity in your home faster and you'll own it free and clear sooner. But the monthly payment can be much higher. The principal and interest payment on $200,000 borrowed for 30 years at 3.75 percent is $926. The same amount borrowed at 3.25 percent for 15 years comes to $1,405 a month a $479 difference.
Borrowers still have options if a 15-year mortgage is too expensive. They can also refinance at 20 or 25 years, or some term shorter than 30 years, he said. Such a loan is "more manageable and gives people the ability to save five, six or seven years on their loans. Yet it doesn't bind them or create a cost they can't manage," Roberts said.
"No cost" loans may be costly • Bennett thinks no-cost loans where the lender pays loan fees for the borrower and recovers them by charging a higher-than-normal interest rate might be a good idea if the borrower doesn't plan to stay in a home for more than three or four years. Otherwise, Bennett thinks the borrower should pay the loan fees in order to get a lower interest rate and reduce the amount of interest paid over the life of the mortgage.
On a $200,000 loan, every 0.125 percent increase raises the borrower's monthly mortgage payment by $14 a month, Roberts said. So if a borrower accepts a 30-year mortgage rate that is 0.375 percent higher than a normal rate in order to avoid $4,200 in loan fees, the mortgage payment will be $42 a month more, he said.
"I always ask the client how long he plans on staying in the home. If it's only three years, most likely it will be better to do a no-cost loan. But if he stays longer, we'll probably have them pay fees because they'll pay less interest over the life of the loan," Bennett said.
Rethink paying off a mortgage • Bennett and Roberts understand why homeowners want to pay off their mortgages early. Few things feel as good as knowing you own your home, free and clear. But homeowners should have a higher priority. They should pay off their higher-interest consumer debt before they pay off their houses.
Bennett has met lots of people who will pay an extra $200 on their mortgage instead of getting rid of their credit card debt. The strategy makes no sense to him. He advises people to accelerate their credit payments, then turn to the mortgage.
"If you had two credit card payments that you pay $200 a month each on, that's $400 that could go toward the mortgage principle" once the cards are paid off, he said.
Roberts said a good loan officer will counsel clients not to pay down the mortgage principle until the consumer is debt-free.
"Everybody should use somebody in the mortgage business as a sounding board, to talk about these things if they have questions about it," Roberts said.
Do the math
Local loan officers remind borrowers that refinancing doesn't come cheaply. The principal and interest payment on $200,000 borrowed for 30 years at 3.75 percent is $926. The same amount borrowed at 3.25 percent for 15 years comes to $1,405 a month a $479 difference.