Ailing Economy's Lower Rates Provide Opportunity to Refinance

By Ilyce R. Glink and Samuel J. Tamkin
Saturday, February 16, 2008

The economy is going through a rough patch, and the stock market is well below its all-time high. Mortgage rates have been dropping since the end of last year.

For homeowners, that can mean only one thing: It's time to think about refinancing your mortgage.

"If you can save on the interest you're paying, then it's time to do a mortgage refinance," said Fred Glick, managing member of US Loans Mortgage, a mortgage broker in Philadelphia.

For some homeowners whose adjustable-rate mortgage interest rates are rising, the low interest rates on 30-year and 15-year fixed-rate mortgages offer an opportunity to refinance into a loan that's a known quantity.

"If you have a mortgage that's going to adjust, it's important to get into a fixed-rate program now," said Emma Butler, a certified mortgage planner with Mobium Mortgage Group in Chicago.

This week, Freddie Mac's weekly survey of mortgage rates found that a 30-year, fixed-rate mortgage averaged 5.72 percent, with fees totaling 0.4 percent. A 15-year, fixed-rate mortgage carried an average rate of 5.25 percent, plus 0.4 percent in fees.

A year ago, 30-year mortgages averaged of 6.3 percent, while the average 15-year mortgage was at 6.03 percent.

So should you refinance now or wait to see if interest rates drop more?

Conventional wisdom used to say that if you could cut two percentage points off your interest rate, you should refinance. But today, with zero-cost refinance options widely available, it may make sense to refinance if you can shave a half-point off the rate without lengthening the loan term.

"If you can save money by doing a mortgage refinance, you should do it," Butler said. "Some clients lately have saved $250 per month by refinancing."

But understand that with a zero-cost refinancing, you won't get the lowest interest rate for your mortgage.

"You can expect to pay an additional quarter percent in the interest rate if you want a zero-cost refinance," said Dick Lepre, a senior loan consultant with Residential Pacific Mortgage in San Francisco.

One problem some homeowners are having is that they had listed their properties for sale. Some lenders will not refinance a property that had been listed for sale within six months of the refinance. But other lenders will, Butler said.

"Some will let you do a mortgage refinance if the property has been off the market for one day. It varies from lender to lender," she said.

"We have three investors we work with who will do Fannie Mae loans even on properties which have been off [the multiple listing service] . . . for one day," Lepre said. "One of the three will not allow you to do a cash-out refinance, but the other two will."

When should you refinance?

"Don't do it to go on vacation, buy shoes or go out to dinner. Do not mortgage your house for something like that," Glick said. "But if you're going to pay off your credit card and cut it up, or if you need to do it so you do not go into default on your loan, then, absolutely, you should refinance."

Glick said you should never do a mortgage refinance just to get a tax deduction.

And finally, don't refinance to lower your payment but lengthen your loan, unless you are facing possible foreclosure.

When you refinance, the goal should be to lower the amount of interest you're paying, either by lowering the interest rate or shortening your loan term, Glick said.

Q My wife and I are thinking of tearing down our house. We love the neighborhood, and our street is experiencing a lot of tear-downs. Our house is a 1946 ranch that would probably fetch north of $500,000 if we sold it outright. We paid $249,000 10 years ago, owe $170,000 and have been paying down a 15-year mortgage at 4.75 percent for the past four years. We also make an extra payment each year. We have a small second mortgage that we used to pay off my law school loans.

The houses being torn down are smaller than ours and sell for less than $400,000. In their place are 5,000- to 6,000-square-foot brick houses with garages, an unheard-of premium feature for our street. These homes go for more than $1 million.

Should we tear down our house? Does it make economic sense? I think we could build our dream home for about $400,000, and then we would be sitting on a ton of equity. Heck, the land alone is worth more than we owe.

AWhether you tear down or sell your house, you've made a good investment.

The way to think through the financials is to take a look at your baseline costs.

The house cost you about $250,000. If you spend $400,000 to tear down the house and build another one, which is $80 a foot for a 5,000-square-foot house, you will have spent $650,000.

If you can turn around and sell for $1 million, you will have a net profit of $350,000. As of today, you can sell for $500,000 and earn a net profit of about $250,000.

So, on the face of it, if you're right about the cost to build, you're better off tearing down your house and building a new one. But aside from the direct costs associated with your project, there are other expenses and costs that you're not taking into consideration.

First, you need to live somewhere in the year you're not living in your house. Add another $20,000 for that expense, and that's pretty modest.

Also, in terms of estimating the cost to build a luxury house, you may need to talk to some local home builders to determine construction costs. You may find that it will really cost you about $150 to $200 per square foot. A 4,000-square-foot house would cost you $800,000 to build.

Often, there are costs a homeowner fails to consider when estimating the costs of construction, including the architect's and contractor's fees, municipal permit fees, temporary fencing fees, disposal and hauling fees, and landscaping costs.

Once you have a detailed budget for your new home, you may have a better idea of what the tear-down and new house will cost, which will help you determine where you might end up financially after you build your dream home.

If you can afford the costs of building and you live in the neighborhood for 10 or even 20 years, you will enjoy the benefits of your new home. That has a value to it, and it may not be monetary. In the end, when you sell the home, it should be of a construction type and quality similar to homes in the neighborhood to reap the benefits of the newer, larger, more modern homes.

Builders have a general guide for tearing down in some neighborhoods: The land cost is about one-third of the final cost of the house. So if the land costs $400,000, the builder figures he needs to sell a house for $1.2 million. Typically, the profit is 10 to 15 percent, so the house would cost about $600,000. The builder also has to carry the cost of the land and hopes to sell the house quickly.

You can see how a builder could quickly get into trouble if he is carrying the cost of a $1 million house and it doesn't sell quickly. All profit would evaporate.

There may be another option -- can you gut-renovate the house and add to it? You may have some savings there. A renovated house will look and feel new, and in some communities it may maintain a lower real estate tax base.

Another option would be to buy a manufactured house -- designed and built elsewhere, then trucked in and laid on a prefab constructed basement. It's a stick-built house, just built under cover somewhere else. It may cut costs -- less than $100 per square foot may be possible -- and save you a lot of time.

We bought our house in 2004. It's 30 years old, and there has always been an empty lot bordering our lot on the north.

A man from Europe bought that lot, also in 2004, but because of hurricanes, no construction began until 2007. On our side of the property line, but with a root system extending north, there was a sea grape tree, which is environmentally protected at the beach. The builder bulldozed this tree when clearing their lot.

I'm not upset with owners -- they are out of the country. I'm distressed that the tree was destroyed and that the builder had to trespass on my lot to do it.

What are my options for restitution? Do I have to sue the owners? I hold the builder responsible.

You should talk to the local building department about what happened. Show them photos and ask them if they want to act against the builder for tearing down a protected tree.

If the municipality declines to press charges, you should contact the owner and explain what happened. The owner may simply offer you a cash settlement. If not, then you can consult a lawyer and decide whether to pursue the owner or the builder in court.

I'm buying a house. The seller refuses to sign closing paperwork unless I give her $3,000 cash for her house payments. The escrow is closing. Am I being blackmailed?

Yes. Hire a lawyer to make it clear that this is unacceptable. If the seller doesn't want to listen to reason, then you and your lawyer can discuss suing the seller for specific performance, that is, selling the property for the pre-determined price.

But here's one thing to consider. If the seller needs the additional funds to close on the home and is several months behind in her mortgage, and the house is now worth less than she owes, her lender might torpedo your deal. Discuss this with your lawyer.

I live in Delaware, 10 miles from the beach. I have put my house up for sale. It is completely remodeled inside and out. I intend to go back to Florida's west coast, which is where I lived for 25 years. Would it be a mistake to buy a house in Florida before I sell here? And what are the downsides to showing an empty house as opposed to a furnished one?

Selling a vacant home is difficult, especially now, when there are more than 2 million vacant homes for sale nationally. Most of these houses are owned by investors who never lived in them and can't find anyone to rent them. It's tough competition for sellers like you.

The reason that vacant homes are more difficult to sell is that buyers have a hard time imagining what a vacant home will look like with their stuff in it. Vacant rooms lose all sense of proportion because there's nothing for your eye to use as a tool for comparison.

Even if you took a measuring tape and an outline of your pieces of living room furniture, and laid them out on the floor, you would have a hard time imagining how they'd look in the room.

It's also easier for buyers to see all of the flaws of the house.

As for buying your new house first, it depends on how quickly homes are selling in your area and how much money you can afford to spend carrying two loans. If it were me, I would sell first and then buy. In this market, it's the safer bet.

I'm looking to refinance my 30-year, $100,000 mortgage. The interest rate is 6.5 percent. This mortgage is eight months old, and my credit is good. Should I try to refinance with my current mortgage company or shop the rate?

Usually, I think about mortgages as a commodity -- that is, you can pretty much shop around, and as long as you're going to a legitimate lender (whether it's a national lender, mortgage broker or local bank), rates will, by and large, be available at the same price.

The mortgage market is generally efficient -- because of the Internet, everyone knows what the competition is charging, and so no one wants to be much higher than anyone else. Consequently, prices are about the same.

Except now. The mortgage market has become chaotic. There is a lot of variation in what loan programs are being offered at what rates. You will really need to shop around with several lenders to find the best program for you with the lowest fees.

There's no downside to shopping around to see what you can get and how much you'll save.

And, by the way, if you belong to a credit union or are eligible to join one, you should check there for mortgage rates. Credit unions tend to offer the best programs at the cheapest rates.

As for your current lender, you should consider talking to a loan officer at the company in any event. If you have received an offer from your current lender, you can pursue that.

Sometimes talking to your lender can be more difficult than starting from scratch. In other cases, lenders will go out of their way to take care of their current customers and may even streamline the refinance process for them.

If someone puts your name on a deed without your knowledge, is it legal?

Let's start with the concept of a gift. If I want to give you a gift, I can buy it and then give it to you. If you accept the gift, you become the owner of the gift.

If a person decides to give a gift of real estate to someone, they can buy that property and deed it to someone else. But that alone will not be sufficient to transfer title to the recipient. The person receiving the real estate as a gift must do something to accept it.

If someone simply records a document transferring title to a second person, the document would be legal but would not transfer ownership of that title without some form of affirmative acceptance by the person receiving the property.

In most states, there are more documents that are signed by the former owner and the new owner of the real estate. If there is a purchase, the new owner receives the deed, obtains a mortgage, receives the keys and garage door openers, and changes the utilities in the home to their own name.

If there is no form of acceptance, express or implied, the recipient will not have acquired title to the property.

Frequently, people ask whether they can quitclaim their timeshare interests back to the developer. If the developer does not accept the transfer, the owner will still be responsible for all the costs and expenses associated with the timeshare property.

If, however, you are asking whether someone can put your name on a deed to try to transfer your ownership in a piece of property, that document would need your signature. If it does not have your signature, it would not transfer your interest.

If the signature is forged, you would still be the owner of the property but would face a mess trying to prove the illegal transfer, among other issues.

For real property to be transferred, generally there must be a document that transfers title from the current owner to the new owner. That document must be signed by all owners of that property.

In some cases, a property can be transferred by court order or other legal mechanisms that would not require the owner to sign the deed. For practical purposes, however, most real estate transfers are undertaken with all of the current owners executing the document.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, http://www.thinkglink.comandhttp://www.expertrealestatetips.net.

Copyright 2008 Ilyce R. Glink and Samuel J. Tamkin

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