Consider This . . . Home Refinancing

Slowly but steadily over the past 30 years, several factors like property appreciation, personal income growth and greater family mobility, have dramatically altered our concepts about residences---the size and value of our residences and the related ownership costs.

It is worth noting that in 1967 you could buy a three-bedroom home with a couple of baths and a garage for about $25,000 in Anne Arundel County. Today, in the State of Maryland, through the 10 months ending October 2002, Maryland reported that there were 20,197 new single family homes built, with an estimated value of $2,643,000,169 or an average price of $130,876 per residence. Anne Arundel County placed 11th in the state with 1,759 new single family homes and with an average price of $119,763. It is interesting to note that Garrett County in western Maryland placed first with an average price of $187,652 on 310 new homes. The used home market values have moderated somewhat over the past few years but, with an abundance of waterfront and upscale properties locally, the used residence values remain high. A review of the new and used real estate sales section in the December/January 2003 issue of this magazine showed 79 sales with an average value of $551,531. At those price levels and given the volatility of the mortgage market, it is no wonder that the refinance options are plentiful and are scrutinized daily by most home owners and those wishing to own their own home.

Shopping for mortgages or just monitoring rates has been revolutionized by the Internet and, to some extent, by email. I particularly like the format and data available at At this site, you can quickly see trends, rates and tips. I recently spoke with a banker/businessman/friend who told me he was participating in 15 or more refinancing or new purchase closings a week, just from one lending source. The pace is hectic and everyone wants your business.

The first test for most people starts with a comparison of rates. Using our average new home of $119,763 and borrowing $107,787, or 90 percent, a hypothetical rate of 6.5 percent fixed rate for 30 years would yield a payment of principal and interest of $681.28. Lowering the rate to 5.5 percent would change the payment to $612 and result in a 30-year savings of $29,940. Stop---don't commit yet. You have to consider closing costs such as appraisals, points and filing fees, which can be 0 to 4 percent of the borrowed amount, on average. You might consider borrowing additional monies for home improvements or other personal needs. Finally, you must consider how long you intend to stay in the residence. Since you would be saving approximately $70 per month in my illustration, any anticipated departure within 48 months might negate any or all of the refinancing savings.

Other significant considerations concern the structure and variables of the loan. It is always a surprise to borrowers to see how little the payment amount changes when you agree to a 15- year payback period versus 30 years and, correspondingly, how great the interest savings are. Using the mortgage amount from the earlier illustration, a 15-year mortgage at our new 5.5 percent rate would give us a monthly payment amount of $880.70 and a savings of $45,858 over the life of the loan.

An adjustable rate mortgage is another borrowing technique that often gives the borrower a much lower initial interest rate but is adjustable upward with limits or caps based on certain market conditions that the lender may impose on the borrower. Short term tenancy with a good cap rate can make this a good thing. An ARM at this writing could be secured at less than 4 percent for up to three years.

Another popular payback technique is the biweekly mortgage. This mortgage requires you to make a payment every other week. This precursor to the 15- year mortgage is an accelerated payback schedule that is more fully explained at Check to see if your bank has this option. Most banks don't want the paperwork hassle, but there are a few banks that don't mind and are even willing to allow you to convert your existing mortgage to the biweekly method.

Another word of advice is to watch for prepayment penalties. Most people assume that they can walk into the lender's office and write them a check to pay the loan in full. With investment earnings rates falling to new lows, lenders are not anxious to have borrowers pay off loans. Many have prepayment penalties. Check the fine print.

The last consideration is the tax impact of the savings in your personal income tax return. Home mortgage interest is one of the few deductions still allowed by the IRS. Don't forget that if you are refinancing a primary mortgage or a home equity loan, your overall interest deduction should now be smaller and therefore you may owe more tax than you anticipated. I recommend that borrowers contact a professional tax consultant before they make a final decision. Even though most states have a right of recision period, it is a lot less complicated and less expensive if you have done all the homework and computations first.

Finally, if you are feeling a bit intimidated after this quick trip through refinancing, try one of the numerous web sites, like the refinance calculator at This free step-by-step program will ask you all the questions and then give you a printed solution to your refinancing conundrum.

If you have comments or suggestions, or have an idea for a future computer or business topic, e-mail me at or

Jimmy R. Hammond, CPA, is a resident of Annapolis and a consultant to businesses in Annapolis, Baltimore and Washington D.C.


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