The Mystery Housebuyer

Refinancing in a hot market

It seems like everyone wants to offer mortgage refinancing today photo: Woodley Wonderworks

Let’s assume for the sake of argument (and for this column) that you want to refinance your home or condo. Is now a good time? How should you go about doing it?

Like many of you, we purchased our home, a condo, on the assumption that we would be there for a long time. We were not looking to rent it out to someone else; we were not looking to flip it and make a killing; we were not looking to live in a palace that we couldn’t afford. As I’ve chronicled in Mystery Housebuyer columns past, we found exactly what we wanted after a careful search, and we’ll be happy to grow old in it.

But there is something we’d like to change. No, I don’t mean the sliding doors in the hall closet (but those do need to go); I mean we want to lower our monthly mortgage payment if possible. The first few years after purchasing a home are often the tightest financially; that is the time when you’ve figured out your finances to the nth degree to make it work, often with very little wiggle room. Following that, through the good graces of fairly regular salary increases and the wonders of inflation, your mortgage burden magically gets smaller each year until you are literally paying less for your beautiful home’s mortgage than someone else is paying for a smaller rental. This is the American way.

But our entry into the American dream was made possible by mortgage insurance from the Federal Housing Administration (FHA). FHA loan rules are changing this year, but for those of you with older FHA insurance, you generally stand to pay it for five years or until your loan-to-value (LTV) ratio drops to 80 percent. With housing values rising so far in San Francisco in such a short time, that will help your LTV (and the lower the better). Many people will find themselves suddenly able to shed their FHA mortgage insurance premium (which can be hundreds of dollars a month in extra mortgage cost) thanks to this good old-fashioned American real estate boom we’re currently experiencing.

So now is a good time to seek refinancing. Home values have been rising in San Francisco for more than a year. In our case, they started rocketing up right after we entered escrow to purchase our place. So if you want to join us in the Great Refinancing Hunt, what should you do?

Get quotes. Definitely don’t just go with the first company that offers you a good deal or that you used last time; you might be surprised at what you can find in today’s very competitive real estate finance marketplace. If nothing else, getting multiple offers (and making sure each lender knows you are talking to a number of lenders) gives you more confidence that you’ve made the right decision.

Go to the financial institution that owns your current loan and tell them you’re considering refinancing your home. Ask them for their bid. Don’t worry that you’ll make them mad; this is what they do for a living (and they get fees for generating new loans anyway, so your pity is misplaced). Unless you borrowed from the mob, you should have no problem getting a pretty good quote from them. They will likely stress to you that the numbers they give you (on loan amount, interest rate, monthly payment, can you roll closing costs into the loan, etc.) are estimates and might well change when they have done their review of your property assessment, income statements, and other information.

Make sure it’s all apples-to-apples comparisons. It can be helpful to focus on the bottom line — what is the new monthly payment — but be sure to match it up item-for-item with the estimates you get from other potential lenders. Does it include the property taxes or will that be separate? Did they add points (real estate finance terminology for additional fees based on a percentage of the loan)? Is the interest rate fixed or adjustable?

Talk to your real estate agent. I know that sounds like stereotypical pleading to generate business for them, but I am neither a real estate agent nor am I in the pocket of the National Association

of Realtors. I just know that our agent was incredibly helpful all along the way and very knowledgeable about the entire process; he also has a stable of mortgage brokers and contractors he recommends — but never pushes on his clients. So if you are lucky enough to have an agent you trust, give him or her a call and ask for advice. Agents are out in the marketplace every day, so they might have very good input about timing and questions you should ask potential lenders.

During times of falling or stable interest rates, people might find themselves refinancing multiple times. But as a last point, I would strongly suggest that you don’t bet on interest rates remaining low forever. Take the refi deal that fits for you today and tomorrow, even if you stick with that loan for another 20 or 25 years. If there’s one thing that’s true in California even more so than in America as a whole, it’s that real estate prices and financing go through a boom-and-bust cycle, and you don’t want to be caught a high-priced bust loser.

It’s great to be an American.

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You would not believe how anonymous Anonymous is. Actually, it's John Zipperer. E-mail: [email protected]