Home refinancing can save money -- or buy a new kitchen

Saving $200 or $300 a month may be all the reason anyone needs to refinance a home loan, but with mortgage rates under 10 percent in many places, some people are finding even more reasons. One of them is extra money for home improvements. Others are opening individual retirement accounts (IRAs), saving more money for college, or finding new investments. And everybody is waiting to see how low rates will go.

Last week, a Salisbury, Mass., couple we know began a refinancing process that will turn their 14 percent, 25-year adjustable-rate mortgage into a 9 percent, 15-year fixed-rate loan. But when they're all done, their $750-a-month payments will be just about the same.

Instead of smaller monthly payments, this couple is taking out a bigger loan at a lower rate and ending up with about $10,000 in cash. This will be used for a new kitchen and bathroom, including a new refrigerator, stove, cabinets, bathtub, sink, lighting fixtures, and all new wiring and plumbing.

The result will be a shorter loan that builds up equity faster and a more valuable house because of the improvements.

``We've had a lot of refinancing for home improvements,'' says Fred Downing, vice-president for sales at Pioneer Financial Corporation, of Malden, Mass., the new lender for this couple. ``People have learned to fit these payments into their budget and this lets them keep those payments and make improvements'' without taking out a new loan or a second mortgage on their house.

For whatever the reason, the refinancing business -- like the home-selling business -- is in the midst of a boom. When mortgage rates were sliding toward 10 percent, the refinancing business stayed fairly quiet. But with rates at or below that magic number, the loan offices are busy with both refinancing and new-home loans.

``We've gone to a six-day workweek to handle it,'' says John O'Donnell, executive vice-president of First Mutual Savings Association in Pensacola, Fla. ``People kept waiting for interest rates to drop, and now everybody has decided now is the time to buy.'' The bank is charging 10 percent for a 30-year loan and 9 percent for a 15-year loan. On a $70,000 mortage, the monthly payments would be $609.22 for the 30-year loan, and $725.22 for the 15-year variety, he calculated.

In addition to adding an extra work day, the bank has expanded to 12-hour days and put on several more people to answer basic phone questions and set up appointments, Mr. O'Donnell said.

``We've had some of our members tell us they're booked well into April with customers who want to make appointments for refinancing,'' says Thomas Marder, a spokesman for the Mortgage Bankers Association.

For some of those people, waiting until April may be worrisome: Will mortgage rates stay down that long, they wonder, or will they start creeping back up while we wait for an appointment?

They probably don't need to worry; the wait may save even more money.

``I see mortgage rates coming down another 50 basis points [half a percent] over the next few months,'' says Robert Gough, an economist with Data Resources Inc., a Lexington, Mass., consulting firm. ``They might hit bottom late this spring or early in the summer.''

``Two things are happening'' to keep interest rates down, he explained. ``The economy is just not heating up that fast. And the policymakers, including [Federal Reserve chairman Paul] Volcker in the US and central bankers in other industrialized nations, have made a conscious decision to keep interest rates down.''

``We think rates will come down a little more, about 50 basis points,'' agrees Sandra Shaber, vice-president and consumer economist at Chase Econometrics in Philadelphia. She thinks the slide will be a little slower, however, not bottoming out until fall.

``Personally, I'm fascinated by the implications this has for freeing up consumer discretionary spending,'' she said, contemplating the possibilities for home improvements, other spending, and added savings.

Whatever the reasons for refinancing, the rules are still the same. The first is that the new rate should be at least 2 percentage points lower than the old one, something that's not hard to do for people who took out loans at 13, 14, or 15 percent just a few years ago.

Also, you should plan to stay in the house for about two years after refinancing (unless your new loan is three, four, or more points less; then you can break even in a much shorter time). The reason for both rules is the same: to produce enough savings and enough time to make up for the costs of refinancing, including an appraisal, a loan-origination fee or ``points,'' which often run 2 percent of the new loan balance, and a title search.

A title search, often costing around $500, may seem like an unnecessary added expense when a title search was done when you bought the house and it hasn't changed hands since, but there is a good reason for it.

First, almost no lenders keep home loans in their own portfolios anymore; they sell them on the secondary market to outside investors. Those investors insist that all mortgages have clear title. Second, both your lender and those secondary market investors want to make sure there aren't any outstanding liens against your property. A mechanic's lien, for instance, may have been put on a house by a contractor who made earlier improvements, like a swimming pool or kitchen cabinets, and wasn't fully paid.

However, when you're asking lenders about refinancing and comparing rates, points, and other charges, you may find some charge less for a title search. But then, they might charge more for something else, so shop carefully for the best deal and the biggest savings.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.