'Roll-in' mortgage loans can
help pay for refinancing
-- like obtaining most home loans -- costs money because of upfront
fees charged by lenders. These costs can easily amount to a few
thousand dollars, and that prices some borrowers out of the market,
even with rates near record lows.
"Roll-in" loans available
today, however, offer a way out. They allow people to finance the
costs into the balance of their new loan, giving borrowers who plan
to stay put for a couple of years the chance to save just as much
money as others over time.
"The key question is, 'How
long are you going to be in this mortgage?'" says Eric Burgoon,
senior vice president at Old Kent Financial Corp.'s mortgage company.
"If you're only going to be in the home for say, three years or
less, while you'll be saving more each month, you're not going to
be there long enough to recoup it.
"But over time, you'll come out way ahead."
Bang for the buck
For example, say customer A
still owes $70,000 on a 30-year fixed mortgage at 9 percent for a
$100,000 home. If mortgage rates were 7 percent, that customer could
refinance, roll in $1,700 in closing costs and obtain a new loan for
$71,700, according to Andy Barnes, south Texas regional manager for
Roll-in loans work for refinance customers the
same way low-down-payment loans work for new home buyers -- they
offer the most bang for the least buck at closing. By waiving the
cash-in-hand requirement of other loans, these programs best serve
people who have a reasonable amount of equity, want to reduce their
overall interest expense and plan to stay in their homes.
Borrowers can also pay extra
"points," or fees equal to some percentage of their loan balances,
on roll-in loans to reduce the interest rates assessed. Using this
option, the same customer could get a 5.875 percent rate without
plunking down any additional cash at closing, Barnes adds. Guaranty
Federal is a subsidiary of Temple-Inland Inc.
"If their goal is to minimize
their out-of-pocket expense, but at the same time get a lower rate,
then rolling the costs in helps," he says. "You can load in basically
all the costs."
Longer stay in home
While this option remains attractive for many borrowers, homeowners
should note that rolling costs in extends the amount of time they
have to stay in their homes before refinancing pays off, lenders
say. It would take slightly more than 10 months to make up the money
spent on refinancing the 7 percent loan, for instance, compared
with almost two and a half years on the 5.875 percent mortgage.
"The more you add in, the
longer the payback period," says Craige Naylor, vice president and
regional production manager for Continental
Savings Bank in Seattle.
Increasing the loan balance
by rolling costs in also subjects some borrowers to private mortgage
insurance payments they may have eliminated on their old loan, Burgoon
adds. The insurance protects lenders against loan defaults, and
is charged on mortgages equal to more than 80 percent of a home's
So someone with a $100,000
home who had paid down the original mortgage to $79,000 would have
to start paying PMI again if $2,000 in refinancing costs were rolled
into a new $81,000 loan.
The greater the loan amount in proportion to the home's value,
the higher the monthly PMI premium gets, too.
Old Kent's insurers charge
about $27 a month for a $100,000 mortgage with a so-called "loan-to-value,"
or "LTV" ratio, of between 80 percent and 85 percent, for example.
At 85 percent to 90 percent LTV, the monthly premium rises to $43,
and at 90 percent to 95 percent LTV, the cost touches $65.
Most refinance programs also
cap the allowable LTV at 97 percent, Burgoon says. That means some
borrowers won't have the option of rolling their costs in no matter
For customers in that situation,
the best option may be "premium pricing" loans. These require no
closing costs or points, but carry higher rates as a trade-off.