Refinancing Tips From the Front Lines of the Mortgage Mess

Jan. 13, 2009— -- There's a slight thaw in the mortgage market, and what's heating up is refinancing.

"Might be doom and gloom for some people, but right now there's a lot of activity," said Keith Kantrowitz, president of Wall Street Mortgage Bankers.

"Business is up again," said Michael Moskowitz, a mortgage banker with more than 25 years of experience and president of Equity Now. "90 percent of business is refinancing."

With interest rates at historic lows, though, it's difficult to decide when refinancing is worth it.

So, "Nightline" asked for tips from some mortgage bankers who are on the front lines, as well as from America's financial guru, "the money lady," CNBC's Suze Orman. Her new book, "Suze Orman's 2009 Action Plan," is filled with tips about what people should -- and shouldn't -- do with their money right now.

And one thing to consider is switching a current home loan into one with a lower interest rate.

"Do the numbers," Orman said. "The numbers don't lie."

1. Analyze Your Finances

The first thing Orman suggests is to figure out monthly payments right now, then figure out what they would be at the interest rates being offered now. Orman gives an example:

"Let's say it's a $150,000 mortgage, you're going to refinance from about 6 percent interest rate to maybe 4.75 percent interest rate. And let's just say your payments are going to go down and you're going to save maybe $200 a month."

That sounds great, right? But there's more to it.

2. Do the Math

Orman continues with her example: "So you're now saving $200 a month, but it's going to cost you $5,000 to finance. You would divide the $200 you're saving into the amount of money, your closing costs -- the amount it's going to cost you to refinance -- and that will give you a specific number of months. If you're going to live in that house longer than the months it will take to recover the closing costs, refinance. If, however, you're not, don't refinance."

3. Compare Rates

The next order of business is to know what rates are out there. They will vary by lender, as well as by type of loan, and by how long the term of the loan is. Moskowitz says consumers should shop around.

"Unfortunately, people spent more time picking out their ties than they do on whether they should refinance or not," Moskowitz said.

Moskowitz says consumers are seeing incredible rates at the moment. "People are looking at rates they haven't seen since the 1960s and 1950s," he said.

The old rule of thumb used to be that if a rate could be lowered by 2 percent, it made sense to refinance. Moskowitz says that's wrong, depending on how large that loan is.

"Basically, if you have a $400,000 loan and are in a low-closing-cost state, it may make sense to go from 5.5 percent to 5 percent because you are saving $2,000 a year," he said.

Ormon says it's important to know the "true cost" of getting a loan.

"Always look at your closing costs, divide the amount of money you'll be saving per month into that closing cost, and then you will know," she says.

Many mortgage brokers agree that if the costs of the closing can be recouped in 12 to 16 months, and the owners plan on staying in the house that long or longer, it's a good idea to go ahead with the refinancing.

4. Fix the Rate

In the past when rates were higher, many homebuyers went for adjustable rate mortgages. But now, with the market in free fall, lenders say homeowners are looking for stability. Exotic mortgages are out. Borrowers are opting for traditional fixed rate loans.

"A lot of people want to get in to more stable mortgages, 30-year fixed mortgages," said Kantrowitz.

"People who have adjustable rates, if they are going to live in the house for a year or two, might consider staying with them because chances are they are adjusting to very low rates today, Moscowitz said. "If they are going to live in the house long term -- five, 10, 15 years -- they should consider locking in a fixed rate."

5. Choose the Length of the Loan

If a fixed-rate loan is chosen, then a decision has to be made on how long that loan should run. Thirty, 20 or 15 years?

Orman says that if homeowners can afford the shortest length, they should go for it.

"If you have a 30-year fixed at, let's say, 6.5 percent interest rate and you could refinance to a 15-year fixed at 4.5 percent or so, you should do it immediately," Orman says. "Please know, if you can afford a 15-year fixed-rate mortgage, interest rates on 15-year mortgages are usually half a percent less than a 30-year. So if you can afford a 15, go for it."

6. Pay for Closing Costs

Refinancing that loan is going to cost money up front, with the appraisal fee, title fees and various other closing costs. How should those be paid? Many mortgage bankers suggest folding those costs into the loan. Orman says no.

"I think you'll kind of be shocked to find out that if you don't have the closing costs up front and all of you may find with that additional money rolled into the loan, hey, maybe you're paying as much as you would have been paying if you'd never refinanced," Orman said. "I think you should only refinance, really, if you have the money up front to pay the closing costs and not roll them in."

Moskowitz warns that it's important to know exactly what is being spent well before closing.

"The most important thing is to get accurate, precise closing costs," he said. And if the numbers aren't what were expected when arrving at the settlement, then don't close, he says.

7. Think Twice Before Taking Cash Out

This was our experts' biggest area of disagreement. Moskowitz says if there is plenty of equity and big bills coming up, it's fine to take a cash-out refinance.

"I don't think people should take money out to live high on," he says. He suggests if six months of living expenses is needed in case a boiler breaks, or if a higher-interest credit card needs to be paid, it may make sense to get that money out and keep it in the bank. But only if the owner is disciplined enough not to fritter it away.

"We're not looking for you to go on a cruise or buy a new car with the loan," Kantrowitz said, "but if you can pay off and reduce your monthly obligations, that's a good objective to achieve."

But Orman says that could be "one of the biggest mistakes you will ever make."

"Why? Because if you lose your job and you can't make the payments on your home, you're going to lose your home," she said. "If you can't make your payments on credit cards, what can they do to you? They can't take your home. Yes, they can sue you and if they win they can put a lien on your home for when you sell it they can get their money back. But they can't take your home."

With a wag of a finger she said, "You are never, ever, ever to take secured debt, which is the equity of a home, and use that to pay off unsecured debt, which is credit card debt. That is a serious, serious mistake."

Orman is tough. When she says "never, ever, ever," she means it. Not even for a good reason like paying college tuition for your children.

"I would not, in these times, be taking equity out of my home to send my kids to school. If my kid wants to go to school, the kid can get a student loan," she said. "You could do many things. But do not risk your home, not here, not now."

And finally, when will consumers know when rates have reached bottom? Kantrowitz laughed as he said, "When it's not there any more, you waited too long."