Real Estate Expert Gives Mortgage Tips
LEON HARRIS, CNN ANCHOR: With that in mind, let's talk about some more positive things that could be happening to you and your wallet. You may have noticed lately that a big percentage of mail and telemarketing calls these days is coming from people who are offering to refinance your mortgage. Now, refinancing can be a very smart move, but it pays to know what you're getting into. A real estate expert, John Adams, was with us yesterday, and he was talking mortgage tips yesterday. Today, it's refinancing tips. Let's start off first of all with the big question who should be refinancing and who shouldn't be.</s>JOHN ADAMS, REAL ESTATE EXPERT: Almost anybody with a mortgage, Leon. This is the right time to refinance although today's stock market rally is probably going to hurt mortgage rates. There's that seesaw relationship that we see, but the problem with refinancing is we're juggling three things. First is what's your savings going to be on the interest rate? The second is what's it going to cost you to refinance, your closing costs, and then the key factor is how long are you going to stay in that house to enjoy the benefits of those savings?</s>HARRIS: That's even more important than where you might be in repaying the current mortgage you have?</s>ADAMS: Absolutely. In fact, where you are really is meaningless. The key is how much can I save and how long am I going to enjoy those savings?</s>HARRIS: Even if you may be two, three, four, five years away from the end of your mortgage?</s>ADAMS: That's exactly right.</s>HARRIS: Let's get to the first of your tips this week. First off you say ask your current lender for a better rate. Ask the lender. You're already paying a high rate too?</s>ADAMS: That's exactly right. They really have no incentive to refinance for you. In fact, it's going to hurt them if they do, but they are going to lose you as a customer, so it's possible that they might offer you a better rate and a little bit of a break on closing costs. Start with them, but if you don't get a quick, good answer, move on.</s>HARRIS: I would think it would be in the lender's interest anyway to make the phone call first, wouldn't it?</s>ADAMS: You would think so, but...</s>HARRIS: Since they know that their customers are going out to refinance anyway.</s>ADAMS: Certainly, you would think so, but that's not the case. And they see a disincentive there, so a lot of them make it difficult for you to refinance because they'll hope you'll just not go to the trouble.</s>HARRIS: Next is if your current loan is adjustable, refinance now.</s>ADAMS: So many people, Leon, over the last five or 10 years, have gotten into adjustable rate mortgage programs, and they were smart to do that because their rate has come down. Now is the time to dump that adjustable rate program and lock in. We're at the bottom of a long-term interest rate cycle. Lock in now an a fixed rate.</s>HARRIS: In other words, they will not be adjusted downward from here on?</s>ADAMS: That's correct. And it's important to note even if this person has a lower rate now on their adjustable and they have to change to a fixed rate that's higher, they should still do that because that adjustable is temporary.</s>HARRIS: Really, OK. Alright. How about this next one, number three: If your current rate is 7 percent or higher, refinance now. So 7 percent is the threshold right now?</s>ADAMS: I think so. If you are going to stay in the house for two years or longer, that's because you can get a 30-year fixed rate loan this morning for 6 percent. Now, if the market rallies, that interest rate is going to be higher, but that gives you a 1 percent annual savings. Closing costs are probably going to run around 2 1/2 percent, so in a period between 24 and 30 months, you would recover your costs of closing. After that, it's guaranteed savings month after month.</s>HARRIS: OK. That's interesting. Number four says: Don't add any closing costs to the loan amount, and that's what a lot of people do. You fold the closing costs into the loan.</s>ADAMS: I don't like it. The reason I don't like it is it adds to the amount of debt that you have out there. And my sense is that the closing costs really should either be paid currently or at least recovered in a short period of time. If you add them to the loan balance, you're essentially financing them for a 15- or 30-year period and the cost of doing that really is great. I'd much rather you pay it out of expenses that you have or cash that you have. If you have to add it to the loan amount, pay that off as quickly as possible.</s>HARRIS: If the difference between the rates you're about to get and the one you're currently paying is 3 percent or more, wouldn't it still be okay to go ahead and fold those in, because you're still going to save a lot of money.</s>ADAMS: No question. No question. But even so, I don't like the idea of you adding to debt. The goal with your mortgage should be principal reduction over a long period of time. So it just sort of rubs me the wrong way.</s>HARRIS: You're starting to sound like my mom now. OK, let's go to number five.</s>ADAMS: That's scary.</s>HARRIS: Yes, it is. Number five: zero closing costs refinanced loans. Now, that's a new vehicle, isn't it?</s>ADAMS: It is. This is an interesting twist where the lender will pay your closing costs if you'll accept a slightly higher interest rate.</s>HARRIS: Isn't that like folding in the interest -- like we just finished talking about not doing?</s>ADAMS: No, well, it is, but it might be worthwhile. Let's say you know you're going to move in two years, and there's no way that you're going to have time to recover the cost of closing. In this case, you'd accept a slightly higher interest rate, still save money immediately, and have no closing costs whatsoever. It's called a zero closing cost refinance option, and it's something you should look into.</s>HARRIS: That sounds almost like a no-lose kind of deal.</s>ADAMS: It is. Win-win.</s>HARRIS: It makes guys like me suspicious, though.</s>ADAMS: It's a no-brainer.</s>HARRIS: OK, John Adams, you've got a big brain on this stuff. I've got to appreciate you for coming in and especially in the bad weather today. I appreciate it.</s>ADAMS: My pleasure. Thank you, sir.</s>HARRIS: Alright. Take care. TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com