Ask Liz Weston

Dear Liz: When does it make sense to refinance a home? I have a 30-year, fixed-rate jumbo loan. The loan is just over 2 years old with a rate of 6.5%. Should I refinance to 5.75% with zero points? I make extra payments every month with the intention of paying the loan off in 15 years, but I don’t want to be locked into a 15-year rate in case I have some difficult times.

Answer: There are no hard-and-fast rules about when to refinance. When refinancing costs were higher, you typically needed a 2-point drop in rates for a new loan to make sense, but that’s no longer true.

Generally, though, you should avoid refinancing if the new loan wouldn’t recoup its costs within two years. Although the loan you’re considering doesn’t charge “points” — a percentage of the loan paid to lower the interest rate — you’ll still be charged other fees. If the lower payments would offset those fees within 24 months, and you plan to stay in the house at least that long, you might consider replacing the loan.

Another factor to consider is how much longer you’ll remain in debt with a new loan and how close you are to retirement. Ideally, you’ll want to be mortgage-free by the time you quit work.

When you’re just a few years into your loan, as you are, this is less an issue than if you’ve paid down your mortgage for five or more years. In the latter case, you should either consider opting for a shorter loan — 15 or 20 years, say — or make extra payments on a 30-year loan if you otherwise wouldn’t pay off the mortgage by the time you’re ready to retire.

photo credit: Qiao-Da-Ye賽門譙大爺

If you’ve got variable rate debt, now is the time to look into fixing your rate.

I wrote this week about the risks of inflation and how prices and interest rates could soar as the economy picks up.

Of course, interest rates are already soaring for many credit card holders. The average credit card rate rose to over 15%, hitting a two-year high, according to IndexCreditCards.com. Even people with good credit scores and on-time payment histories are getting slapped with higher rates, as issuers try to beat the February deadline for the implementation of the credit card reform act.

Here’s what to do:

Mortgages. If you have an adjustable-rate mortgage and don’t plan to move before the rate resets, look into refinancing to a fixed rate if you have some equity in the home. If you don’t have equity, you may be eligible for refinancing under the government’s Making Home Affordable Plan. GET HELP if you go this route–talk to a HUD-approved housing counselor. You can find one HERE.

Credit cards. If you have credit card debt, consider it variable-rate debt, since there’s no such thing as truly fixed rates in the credit card world. Consider getting a three-year, fixed-rate credit union loan to pay off your balances. Interest rates for people with good credit currently average just under 10% for these loans, according to the Credit Union National Association. (If you don’t belong to a credit union, you can find one HERE.) Other options for 3-year, fixed-rate loans are social lending sites such as Prosper and Lending Club. Rates vary according to your credit scores and investor bids but loan rates currently range from 7% to 26%. (Can’t pay off your debt in three years? Then you may be in more trouble than you think. Consider talking to a legitimate credit counselor and a bankruptcy attorney to get a more complete idea of your options.)

HELOCs. Home equity lines of credit are a tougher call. The rates on this type of debt are typically very low and not as subject to the whims of lenders as credit card debt. If you have a home equity line of credit and you’re concerned about being able to pay it when rates rise, however, you could consider a fixed-rate home equity loan or even refinancing your primary mortgage to incorporate the debt and fix the rate.

You also should have a plan for paying off your debt. Read “A debt payoff plan that works” for more.

Dear Liz: I seem to be in a “Catch-22″ situation. My mortgage refinancing was about to close when the lender backed out because I live in a geodesic dome home and there are no comparable sales for domes in my area. I’ve tried to find another lender but none will finance a dome because there are no similar homes to gauge the value. I feel that I am being discriminated against because my house has a rounded roof over part of it, instead of a flat or peaked roof. My broker suggested that I get a reverse mortgage since this does not require comps. However, I do not want to go down that road. Do you have any ideas of what I can do to refinance, now that I’ve lost the low rate I was locked into?

Answer: In the real estate boom, lenders stopped worrying so much about little niceties like accurate appraisals. With the credit crunch, lenders are suddenly obsessed with appraisals, which typically require comparable sales.

“The problem with this is that there is no way to come up with a realistic estimate of value for properties with unusual construction type because there are rarely comparable sales,” said Dick Lepre, a senior loan officer at RPM Mortgage.  “This includes domes, log homes and straw bale construction.”

What you need to find, Lepre said, is a local bank that intends to hang on to the mortgage, rather than sell it to investors. These lenders tend to be more flexible, but there’s no guarantee you’ll be able to find one willing to refinance your loan.

Your situation should serve as a warning to anyone who’s considering buying an unusual home, Lepre said.

“Anyone purchasing a home with any of these construction types should understand that mortgages are and will always be difficult and [that] it is a lot harder to find buyers,” Lepre said. “It is harder to find buyers because there are a limited number of people who want to live in such homes and also because it is harder for those buyers to find financing.”

Dear Liz: I’m in a potentially bad situation with my home equity line of credit. I’m trying to refinance my primary mortgage and would save nearly $150 a month. But the HELOC lender is dragging its feet on agreeing to a subordination. If the lender doesn’t agree, I lose the deal. I’m wondering why the lender does not believe it to be in its interest to help when I am trying to improve my financial situation. Can you give me some insight into the line of thinking here?

Answer: Unfortunately, many would-be refinancers are in your uncomfortable position. They have a second mortgage, such as a home equity line of credit, on their property. These loans are known as “seconds” because the lender is in second position to be paid off when the home is sold, after the primary lender has been paid.

For a refinance to proceed, these HELOC lenders have to agree once again to be subordinated into second position. Some lenders balk because they don’t believe their borrowers have sufficient equity to cover both loans (even though, as you note, a lower payment on the first mortgage could make it more likely that the borrower could make payments on the second).

But a bigger problem seems to be lack of staff and lack of priority. Lenders are so busy trying to meet the demand for refinancing that other concerns, including subordination, often fall to the bottom of their to-do list.

That means you have to be extremely vigilant if you don’t want your refinance deal to fall apart. Call your new lender and your HELOC lender every few days to track the progress of your subordination. If there are problems or missing paperwork, promptly address those issues.

If your rate lock is within two to three weeks of expiring and your subordination still hasn’t been approved, call your HELOC lender and politely ask that your request be given top priority.

If you can’t get through to the subordination department’s main line, ask the phone reps if there is a fax number or e-mail address you can use. If all else fails, take your problem to the bank’s chief executive. You’ll find the name and address online.

Dear Liz: Is there any downside to refinancing? I have 15 years to go on a 30-year fixed-rate mortgage at 6.625%. I’d like to take advantage of today’s lower rates, but the only way I could lower my payment substantially would be to switch to another 30-year mortgage. We crunched the numbers for a 15-year mortgage, but the payment would be about the same.

It feels odd to sign up for a 30-year loan at age 54, but my primary reason to refinance would be to protect myself in case of the unexpected, such as a job loss. I have no other debt and my credit is excellent.

Answer: The benefits of refinancing wane the longer you’ve been paying down your loan. You’re far enough into your mortgage that refinancing to another 30-year loan will increase the total interest you pay over the life of the loans, even if your interest rate drops substantially.

If your mortgage was originally $200,000, for example, you could pay more than $60,000 in additional interest by refinancing the balance at the midway point, as you’re considering.

There are situations where reducing a monthly payment is so important that it’s worth the extra cost. If you couldn’t afford the current payments or were far behind in saving for retirement, you could make a case for refinancing.
Another option would be to refinance to get lower payments, but make extra principal payments when you can to pay the loan off quicker and reduce total interest costs.

But you’ll want to do the math for your particular situation before proceeding. The mortgage calculators at HSH Associates Financial Publishers, at www.hsh.com, can help.

Loan limits for so-called jumbo conforming mortgages have been increased back to $729,750 for the highest-cost areas. That could be good news for home buyers in expensive cities and for homeowners with some equity who’ve been wanting to refinance but who’ve been dismayed at the persistently-higher rates on big loans.

If you need all that translated, here’s the scoop. The dividing line for mortgages used to be $417,000, with loans below that amount eligible to be sold to the big mortgage agencies (Fannie Mae and Freddie Mac) as “conforming” loans.

Mortgages above that limit were considered “jumbo” loans and typically came with a somewhat higher interest rate. “Somewhat” began “much, much” when the credit crisis hit and investors shied away from the big loans they used to gobble with relish. So Congress stepped in by temporarily raising the conforming limit for high-cost areas (think LA, NYC, SF) to $729,750.

That limit dropped to $625,500 at the start of the year, but has now been restored. Interest rates on these “jumbo-conforming” loans with one point (a fee equal to 1% of the loan) have been running about half a percentage point more than regular conforming loans, according to mortgage expert Dick Lepre of LoanMine.com.

“The way these have been priced there is not an attractive no-point loan so the best deals are with one point,” Lepre recently wrote in his newsletter. “Add in the other closing costs [and we] are talking maybe $8,000- $10,000 in costs. To see if this makes sense add that amount to your loan balance and compare the payment to your present one.”

Lepre advises that there are two new restrictions on cash-out refinancing, for those who want to borrow more than their current loan amount (to pay off a HELOC balance, for example):

• You can’t borrow more than 60% of the home’s current appraised value for a cash-out and
• Your middle credit score must be at least 740

These rules apply only to cash-outs, Lepre notes, and just financing the loan fees doesn’t count as a cash-out.

For more about mortgages, read:

• 6  mortgage rip-offs to avoid
• 8 big mortgage mistakes and how to avoid them
• The 3 worst reasons to buy a home

Later today FICO, the company formerly known as Fair Isaac, will announce its Mortgage Recovery Initiative, which is designed to help troubled borrowers find loan relief options while helping lenders identify problem loans before homeowners default.

The consumer part of the initiative will launch Friday at MortgageReliefOnline.com. Borrowers will be asked to provide basic information about their mortgages and will be told within seconds if they appear to qualify for new federal government plans for loan modification or refinancing or if they need debt counseling. Borrowers will be contacted within 48 hours by HUD-approved housing counselors for individualized help and advice.

“The main benefits for consumers,” FICO spokesman Craig Watts said, “are speed, anonymity/privacy, confidence that they are getting top-drawer professional counsel, cost (it’s completely free), and convenience.”

FICO is also offering lenders analytic tools to help them identify and expedite the borrowers most likely to benefit from modifications or refinancing before the loans go bad.

MakingHomeAffordable.gov has an interactive tool that will indicate whether you might benefit from the new modification/refi programs, as well as links to find a housing counselor. But the FICO initiative would seem to make finding help just that much easier.

For more on foreclosure:

• Is your home worth keeping?
• Facing foreclosure? 9 options
• A foreclosure fix: More bankruptcies
• Foreclosure nearby? It’s your problem