'Roll-in' mortgage loans can help pay for refinancing
By Michael D. Larson • Bankrate.com

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
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 appraised value.

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.

Insurance premiums
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 what.

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.