If you refinance, you can roll debt into new mortgage


Are you a Maryland homeowner saddled each month with both a heavy first mortgage payment and a home equity loan payment?

Then this could be the moment to combine your debt into one shiny new first mortgage. The maneuver is called a "debt consolidation refinance" and current mortgage rates make it an attractive possibility. Of course you have to crunch the numbers relevant to you.

But the potential is there to save a lot of money.

"If you roll all your debt into one mortgage, you should come out ahead," says Fritz Elmendorf, a vice president of the Virginia-based Consumer Bankers Association, which represents 700 lending institutions.

But watch out for the pitfalls of refinancing your mortgage in 1991.

Keep in mind that, given the problems plaguing so many U.S. financial institutions, mortgage standards are more tightly enforced than they were during the last refinancing surge of 1986 and 1987.

Due to more intense scrutiny from federal regulators, lenders are more like to go by the book when it comes to loan approval. That means, for instance, that if your credit report is blotchy, you could have problems refinancing.

"It may well turn out that by today's standards, you can't get the loans you already have," observes Paul Havemann, a vice president at HSH Associates of Butler, N.J., which publishes mortgage information on markets throughout the country.

Be aware, too, that your home's value may be judged very conservatively this time around. This is due both to the fact that property values have slumped in some communities and that appraisers are being more cautious in their estimates.

"The wild card in refinancing now is how much your house will appraise for," Mr. Havemann says.

What's causing a new surge in mortgage refinancing is the fact that first mortgage rates have fallen to their lowest point in four years. There are now 30-year fixed-rate mortgages available at 9 percent or less.

Keith Gumbinger, an HSH official, says homeowners "across the country are beginning to flood lenders with refinance applications. Rates this low offer the best refinancing opportunity in years."

To be sure, refinancing won't come cheap. You can count on spending between $1,500 and $5,000 to get your shiny new mortgage. Still, if a round of number-crunching convinces you that it's worth it to refinance your first mortgage, it's probably a smart idea to roll your home equity or second mortgage debt into the deal, too, mortgage experts say.

The wide disparity between interest rates on first mortgages and those on home equity lines is a good reason to roll all your home-based debt into one refinanced first mortgage. Most home equity lines are adjustable-rate loans that float with the market. Even so, rates on these loans tend to float 1 1/2 to 2 percentage points above first mortgage loans.

Certainly the rates on fixed-rate home equity lines and traditional second mortgages have remained high relative to fixed-rate first mortgage loans. You can still expect to

pay an interest rate of 11 to 13 percent on such loans. The reality is that these rates haven't moderated the way first mortgage rates have in recent months.

"Basically they're just high by nature and are probably higher than they need to be," Mr. Havemann says.

Should you decide to take a "debt consolidation refinance" to pay off all your home-based debt, here's how to proceed. After locating a lender, apply for a first mortgage that covers the outstanding balance on both loans. Once the new mortgage is settled, the lender will draw from the proceeds -- cutting a check that prepays the entire balance of your home equity or second-mortgage loan.

If you're interested in a first mortgage refinance for any reason, mortgage experts say you can forget the "2 percentage point rule."

Conventional wisdom long held that you shouldn't refinance your mortgage unless the new rate is at least 2 percentage points lower than the old one. But as Mr. Gumbinger points out, the rule fails to take into account a couple of important factors: what it would cost you to refinance and how long you intend to stay in the home.

"If you're going to be there 10 years, as little as a half percentage point savings can make it worth your while to refinance. But if you only expect to stay two or three years, a 2 percentage point saving is not enough," Mr. Gumbinger says.

As an alternative to the old rule, Mr. Havemann offers this basic quick-and-dirty approach to deciding whether refinancing your first mortgage would be worth it to you:

"Take your savings you could achieve from the lower rate on your monthly payment (or payments) and divide it into the closing costs you'll have for a refinance. The result is the number of months it will take you to break even. If you don't think you'll have the loan at least that long, then it doesn't pay to refinance."

Given the resurgence in interest in mortgage refinancing, HSH recently developed a kit that helps a homeowner considering refinance to go through a step-by-step process in making the decision. The kit is available from HSH for $3. You can obtain one by writing HSH Associates, Dept. Refi., 1200 Route 23, Butler, N.J. 07405.

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