mortgage

Refinancing will help the Andersons ... what about you?

Craig Anderson and his wife Gilda started house hunting in 1999. Early on in the process, rates were low enough that a long-term fixed rate loan was within reach. But as closing time approached, interest rates climbed. Things got so bad, their mortgage provider wasn't sure they'd be able to afford the payments on a fixed-rate loan.

As a result, the Andersons had to switch gears and go with an adjustable rate mortgage. ARMs allow borrowers to buy larger homes because lenders use the lower interest rates and payments that ARMs have at first -- rather than the higher rates and payments they usually end up having after the initial fixed-rate period expires -- when qualifying customers.

"Originally, it was for affordability," recalls Anderson, 31. "By the time we were ready to close, rates were close to 8.5 percent and at the time, he said, 'I don't know if I can approve you at 8.5.' They said, 'The only way I can approve you is if you take an ARM.' So we took the ARM knowing we could get out of it if the rates fell."

And just like clockwork, they did. So, like tens of thousands of other borrowers who took out Arms after rates started climbing in early 1999, the Andersons decided to refinance their Minnesota townhouse. Though their new fixed rate won't be much lower than the rate they're currently paying on their ARM, they will save some money. Plus, they'll eliminate the chance their rate and payments will rise in the future.

"It's just to get out of the ARM to reduce the risk," Anderson says. "I know that the rates have been, you know, above 10 percent in years gone by, so I guess it's not out of the question that it could ever happen again."

Anderson does realize he could miss out on even lower rates if the economy continues to weaken. But he's satisfied with what's available now and doesn't want to risk holding off.

"There's a lot of economic data coming out over the next couple weeks and maybe I'll wish I would have waited to lock, but I don't want to wait too long," he adds. "Sometimes the bottom feeders end up not getting the bait and it's low enough for where it makes sense for me right now."

Subjects:Craig Anderson, 31, brokerage firm margin specialist, Gilda Anderson, 27, employee benefits representative
Place of residence:Maple Grove, Minn.
Home:Townhouse, purchased for $142,500 in September 1999, appraised recently at $160,000
Current mortgage:1-year Federal Housing Administration (FHA) ARM
Rate:7.5%
Monthly P&I payment:$979 
Remaining balance:$138,391
Additional info:Loan rate adjusts annually on Jan. 1, maximum increase of 1 percent per year, 5 percent over lifetime of loan. Index is 1-year Treasury bill average and margin is 2.75 percent. Borrowers pay $56.53/month for FHA mortgage insurance.
New mortgage:30-year fixed-rate, conventional for $142,500
Rate:6.75%
Monthly P&I payment:$924
Monthly savings:$55 (slightly less because mortgage insurance payment increasing by $10-$20)
Closing costs:approx. $3,544 (rolled into loan principal)
Break-even point:64 months, but ... the uncertainty of future ARM adjustments will be eliminated

What other borrowers can learn from the Andersons

People don't need to save much money per month for refinancing to make sense, especially if they plan to stay in their homes for a long time. And peace of mind has to factor into the equation. ARMs are a useful, but potentially dangerous tool. For homeowners who need rate and payment security to sleep at night, refinancing makes sense even if the monthly savings aren't that great.

Lastly, don't wait forever for the absolute best rate. Find one you're comfortable paying that allows you to save money and lock it in. If you miss an extra quarter of a percentage point, so be it.

"Converting an ARM to a fixed for those who really don't care for the uncertainty of the ARM is a smart thing to do," says Rich Comparato, a First Horizon Home Loans regional president in Dallas, who reviewed the Andersons' mortgage situation for this story. "My advice is, if you're happy with the rate being offered and the savings make sense to you and you're satisfied with the lender and loan officer you are working with, then lock in your rate and stop shopping.

"You can always find a better price, but if you continue shopping forever you'll never complete the transaction and begin enjoying the savings."

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