By John Wasik
March 16 (Reuters) - I got a letter from my bank the other day offering a streamlined refinancing deal for my current home mortgage. It was one of those "quickie" offers tailor-made for my loan situation and designed to net swift business for the bank.
What was advertised in the letter seemed like a decent deal -- a 30-year, fixed-rate loan at a 4.16-percent annual percentage rate -- so I called the bank for more details.
As it turns out, there was a lot of fine print that made it seem less decent, but I had to ask a lot of questions to find that out. While mortgage rates are still at generational lows, making it tempting to refinance, you have to scrutinize any deal that is offered. You may not even qualify for the appealing rates that get dangled in front of you.
Banks like to send out these offers to preferred customers, appealing to whatever loyalty they may have toward their institution. Mortgage offers are often hard to compare once you factor in all the expenses, and banks tend to expect indolence and inertia on the part of their customers.
My current mortgage rate is 4.95 percent; so based on my loan balance, I could save about $55 a month or $660 yearly over my present payment on a 30-year loan. Since I usually aim for savings of at least $100 a month in a refinancing, the appeal of the offer was modest. On the rate alone, I could probably do better since the average 30-year rate nationally was 3.88 percent at the time I received the offer, according to Freddie Mac's primary mortgage market survey.
Loaded into this offer are closing costs and other fees: I'd pay $300 for an application fee, $24 for a credit check, plus additional expenses. All-in, my total closing expenses would be around $2,200, the bank rep told me. I could either pay up front or roll most of it into the principal balance, neither of which was desirable for my bottom line because it would reduce my monthly savings, and it would take me nearly four years to recoup the closing costs.
Although the bank willingly gave me the details of the hidden costs of the loan, the rep was soon pitching me on shorter-term loans. Mortgages from this bank had lower rates -- 3.95 percent for a 20-year loan and 3.5 percent for a 15-year note -- but the payments would be higher. They would be up to $185 a month more.
The most salient benefit of shorter terms is that you pay the loans off quicker and pay less total interest. On my present 30-year note, I'd be paying $85,700 total interest, compared to $46,600 for a 20-year loan and $29,800 over 15 years.
Longer or shorter term?
One should never look at only one offer.
Ultimately, I decided to take a pass, even though the rates were tempting.
And, I have a better alternative to refinancing.
If I decide I want to pay down the mortgage sooner -- which I'm likely to do -- all I have to do is send in additional payments and tell the bank to apply them to principal. That avoids closing costs, credit checks and income verification. You can do this any time.
While it won't reduce the annual percentage rate, prepayment will reduce my balance and total interest payments. It would also give me complete flexibility over when the loan is paid off. There are hundreds of free prepayment calculators on the internet, so you can do this yourself. Aside from the benefit of not having to deal with the hassles of the application process, you can't beat the cost.