Refinancing: How To Wade Through The Choppy Waters
VIVIANA HURTADO, HOST:
Switching gears now to important information for American homeowners. Interest rates are at historic lows and, if you're like me, you've been getting letters and phone calls from banks telling you to refinance your mortgage now.
It may be a good time for some people to refinance, but not everyone. And, if you do qualify, how do you make sense of all the rules and fees? Here to give us some pointers is Louis Barajas. He's an author, personal finance expert and one of go-to money coaches.
Louis, welcome to the program.
LOUIS BARAJAS: Thank you, Viviana.
HURTADO: So let's start with the very simple question. Why should someone refinance?
BARAJAS: Well, it's beyond the obvious - right - of just getting a lower interest rate. One of the things that you're really most concerned about is that you would want to lower your monthly mortgage payment because maybe you're having a hard time making those payments. Maybe a spouse or someone in the relationship lost a job and they're having difficulties, so you want to refinance to lower that rate and you could extent the term.
Another thing may be that - there's a lot of people refinancing right now that are - because the interest rates are low, they're actually lowering their term and they're going from a 30 year loan down to a 15 year loan. Viviana, I just actually refinanced my own home to a 10 year loan.
For other people, what they're doing is that, because of this - you know, the recession we've just been through, they've actually - they have a lot of debt and they're trying to pay that debt off with the mortgage, with the equity that's in their home, if they still have any equity in their mortgage.
HURTADO: Just to make you laugh, I also refinanced, myself, so this has been really present on my mind and it's funny because, in my circle of friends, we've been talking about numbers, 3.7, 3.25. It seems like these are the, you know, rates people are getting, but of course, it's not for everyone. So can you tell us who shouldn't refinance right now?
BARAJAS: OK. Well, if you're thinking about refinancing credit card debt and you're not going to cut up the credit cards after you do that, I wouldn't do it. And the reason for that is - I know that a lot of people are saying, well, I'm paying, you know, 19 percent on this credit card debt. But my experience as a financial advisor, now, almost close to 30 years, has been that, when people do that, they end up not only with a higher mortgage, but with their credit cards racked up all the way back to limits again.
HURTADO: So you're actually really...
BARAJAS: So that's one of the things...
HURTADO: ...talking now about a spending habit.
BARAJAS: That's absolutely right. And that's one of the things. The other thing that people should do, right now, is be careful about getting into a mortgage that they're advertising that appears to be very low. You know, you were talking about that three-point-something. Well, there are some loans out there that are advertised for 2.2, 2.4 percent, but they're really adjustable rate mortgages and you don't know that.
HURTADO: Louis, can you define what is an adjustable rate mortgage versus a fixed rate mortgage?
BARAJAS: Sure. An adjustable rate mortgage is a loan that they offer you at a lower starting interest rate and that will adjust according to the current rates for future years. And they're usually based on a specific index and so, for example, an adjustable rate mortgage - the interest rates may go up every year and they'll cap it at a specific amount, like for example, at seven points. So, if you're staring at two percent right now, it potentially could go up to nine percent.
And a fixed rate is - that's it. It's fixed. It'll never change for the term of the loan, so if you've got a 3.5 at 30 year, you're going to have that interest rate for the entire 30 years.
Now, most people don't know how to actually compare loans from one to the other. Should I get an adjustable? Should I get a fixed? There's points on a certain loan. There's no points on the other loan. There's different closing costs. And one of the things that you can actually take a look at and what you want to ask a lender is what's called the APR, the annual percentage rate. And that...
HURTADO: And I was just going to ask you, from the glossary of Louis Barajas, what is an APR? Which all of these questions, by the way, I found asking myself, when I was going through the process.
BARAJAS: Right. And APR actually was mandated by the government at one point in time, where people were very intimidated and confused by different loans. The APR stands for the annual percentage rate, but it's actually taking into account all the expenses, the points, the closing costs and other fees. And an APR actually will give you the real interest rate that you're being charged on a particular loan when they include all the costs. So you'll actually go to a certain bank and they may charge you for this 30 year fixed rate at 3.5 percent and another bank - it's at 3.5 percent, but their APRs will differ.
And so you want to compare, at that point, apples with apples. And it makes it a lot easier to compare which loan is best, so you're always going to go for the one that has the lowest APR.
HURTADO: This is TELL ME MORE from NPR News. I'm Viviana Hurtado. We're speaking with one of our money coaches, Louis Barajas, about the ins and outs of refinancing. Louis, you were talking about some red flags, some numbers, some rates that are too good to be true and having to read, you know, I guess, the fine print to see if it's an adjustable rate and what are the terms of that.
Can you talk a little bit more about other red flags that people should keep an eye out for when shopping around for loans?
BARAJAS: If you've got an interest rate right now on your mortgage at six percent, but you've been paying this loan already for 15 years, most likely, it doesn't make sense to go into a three percent loan. And you say, well, why doesn't it make sense? Because loans are amortized. And at the beginning, almost 90 percent of your loan payment is all interest. Towards the end of the loan, going from, like, the 15th year forward, you mostly have paid off all the interest and you're paying down mostly principle.
So then, it would make sense because I'm seeing people who say they're enticed by the interest rate, but they're not really looking at the entire structure of the loan.
HURTADO: And maybe having to end up paying more when they're close to actually making some, I guess, headway on owning their property?
BARAJAS: That's exactly right. And so one of the things you don't want to do is you don't want to focus just on the interest rate. You want to focus on - what is the loan going to cost me in its entirety, if I actually go the full term?
One of the things - the same thing that we do when somebody's purchasing a car, you know, they try to entice you by saying, how much can you afford? It's not about how much you can afford. It's about how much it's going to end up costing you.
HURTADO: So what should you be looking for in a lender?
BARAJAS: Well, you're looking for somebody who actually is going to sit down with you and ask you, what are you trying to accomplish? What's the reason? Are you hurting right now? Has somebody lost a job? What can you afford? You don't want to go to a lender who can just give you one option and that's it. Also, you have to be careful, right now, that - if somebody tells you, you know what, you don't qualify because you don't have enough equity in the house because your home value has gone down and, based on what you want to pull out as a loan and what you want against the loan, there's not enough equity and we can't loan you the money.
But, you know, there's a program right now, Viviana. It's called the HARP program. It's the Home Affordable Refinance Program that - if you're with Freddie Mae or Fannie Mac - excuse me - Freddie Mac and Fannie Mae - you can actually refinance your home at the lower interest rates and that's set up for that, so there's programs for that. And you can go on the internet and look up that program. It's at www.HARPProgram.org.
HURTADO: And that actually leads to my next question. There are just some people, Louis, who can't refinance, no matter what letters you're getting in the mail or phone calls you're getting, like I was. Can you talk about some of the obstacles that people who can't refinance are facing? You started to touch upon that with people who maybe owe more than their house is worth, being underwater.
BARAJAS: Right. Well, the first thing you need to know is, before you go out and get the loan, you actually take a look at a couple things. You want to take a look at how much you owe. You want to take a look at what your current interest rate is. You want to be comfortable and see how long you've had the loan and then you also want to see the value of your home.
Most people don't know that they can go, actually, to a website called Zillow.com and get an approximate value of their home. And so what you're trying to do is you're trying to borrow from your home, but most lenders will only let you borrow up to a certain amount and, usually, it's about 80 percent of the value of your home.
And so, if your home value has gone down substantially and you live in a specific area where it's gone down 20 to 30 percent and it has not gone back up, you may not be eligible for a loan, so it's important to know that right off the bat. The other thing may be that, during this recession, you also want to pull out a credit report and get a credit score and take a look at if something's happened - if you've been making late payments. Because you may - even though they're advertising very low interest rates, you won't qualify for those low interest rates because you're not - you know, you don't have a 760 on your FICO score. You may be down to 600 and they're going to charge you another point or two and it may not make sense at that time.
HURTADO: That was author and personal finance expert, Louis Barajas. He joins us from Costa Mesa, California. Louis, thanks for being here.
BARAJAS: Thank you, Viviana.
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HURTADO: Just ahead, back to school is stressful for any mom and, if your child has Down's Syndrome, autism or ADHD, you also have to learn to advocate for your child's needs in the classroom.
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