Consider This . . .
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 www.bankrate.com.
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
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 www.biweeklysaver.com.
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
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 http://quickenloans.quicken.com/.
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 firstname.lastname@example.org
Jimmy R. Hammond, CPA, is a resident of Annapolis and a consultant to businesses in Annapolis, Baltimore and Washington D.C.