Refinancing a mortgage is tempting, but there's a group ahead of you

There could be an unpleasant surprise in store for people who want to refinance their mortgages: They're not the only ones trying to take advantage of the lowest interest rates in eight years. People buying homes like low rates, too, and busy lenders are giving them top priority. So when a banker or mortgage company official is faced with a pile of applications for ``first loans'' and a pile for refinanced loans, first loans get first attention. Some lenders have already begun telling people who want to refinance to go elsewhere.

``The delays are so great, some lenders just can't handle it,'' says Thomas Marder, spokesman for the Mortgage Bankers Association. ``So they're trying to be up front about it and tell people they aren't taking applications'' for refinancing.

That's just one of the wrinkles of refinancing which people are running into as they try to cut their monthly mortgage payments or take some equity out of their homes for repairs, college tuition, or other expenses.

In the last few weeks, for example, some homeowners have ended up with a new rate that is slightly higher than they expected. A few weeks ago, a couple we know submitted a refinancing application when rates were 9 percent. Now with the bank about to approve their new mortgage, the rate has moved up to 10 percent. That's still less than the nearly 13 percent they were paying before, but not as much savings as they expected.

Their new rate, however, is still more than two percentage points lower than the old one, which is within the limits set by a rule of thumb for refinancing: Your new rate should be at least two points lower than your old one, and you should plan to stay in the house at least two years. This way, your payments will be low enough, and you'll have enough time to recoup the expenses of refinancing, including the payment of two or three ``points,'' each of which equals 1 percent of the loan.

But what if you plan to stay in the house longer than two years?

In that case, you don't need as big a drop. Some people are already taking advantage of this, exchanging an 11 or 12 percent loan for a 10 percent rate, because they don't expect rates to get too much lower and they plan to stay in the house for several years, perhaps even long enough to see the mortgage paid off. If you do stay six to eight years or more, you'll have time to recover expenses, even if the new rate is only three-quarters of a point lower.

One of the big question marks about refinancing, of course, is catching the best rate. As the couple mentioned earlier found out, rates can go up in the time it takes to get a new loan approved. Generally, it takes six weeks to two months to get an application approved, assuming yours isn't delayed by applications from home buyers.

On the other hand, if rates are going down, making an application now might mean ending up with a lower rate when approval comes along. Several economists have said they expect the recent uptick in mortgage rates to turn around in the next few weeks. If that's true -- and predicting interest rates is far from an exact science -- then now would be a good time to start shopping for the best rates.

But when you're shopping for rates, don't expect to find the best ones in the lists provided by your local newspaper. Usually, these lists are put together by banking officials or associations after they have called lenders in the area, compiled the list, and sent it to the newspaper, which publishes it on a pre-scheduled day.

Thus, the list you see may be at least a week old. In that time, rates can go up or down; some banks may have changed rates, while others may be the same; and some lenders may have changed their fee or point structure. The list is useful if it gives lenders' phone numbers.

When you call those numbers, there are several questions to ask, apart from the rate, points, and application fees and whether the lender is taking applications for refinancing. Some lenders, for instance, will let you ``buy down'' to a lower mortgage rate by paying more points up front. For example, if the prevailing rate is 10 percent and two points, you might be able to get a 10 percent rate by paying three points.

One lender in the Washington, D.C., area, for instance, offers 30-year fixed-rated loans from 9 to 10 percent, depending on how many points the borrower is willing to pay.

With interest rates rising, most lenders won't let you ``lock in'' the current rate at application, as some were doing several weeks ago, but you can ask anyway. More likely, you won't get a firm rate until commitment, when the loan has been approved, or at closing a few weeks later, when you retire your old mortgage by taking out the new one. Some lenders will let you choose between these two dates.

If you've had a 30-year mortgage or a variable-rate loan, you may want to look into a 15-year mortgage. If the rate is lower, the monthly payments may be about the same, but you'll build up equity faster. Then, in the not-too-distant future, instead of refinancing a mortgage you could be burning one.