Uncertainty still swirls around President Obama’s stimulus plan, particularly the foreclosure fix embedded in the stimulus package. Many homeowners, like the one who recently asked me the following question, are  confused over whether they should accept a deal currently on the table or wait until all aspects of the stimulus plan are understood and take affect:

Question: I reside in Bronx, New York, and have paid my monthly mortgage on time for the past 5 years I’ve owned my home. My current interest rate is 6.25% and my monthly mortgage payment is $1,840.55. This past week, I contacted my lender to negotiate a lower interest rate and was told that because my FICO score is 780 and I have excellent credit, my lender could refinance my loan to 5.125%, which would bring down my monthly mortgage payment to $1,440.00 (a difference of $400.55). My bank is charging me $11,200.00 minus a $3500.00 tax discount making my total closing costs for this refinance $7,700.00. My question is, should I wait until Obama’s Stimulus Plan takes affect or should I go with my lender’s offer?

Answer: Congratulations on properly managing your finances and your mortgage and earning a FICO of 780. In times like these, maintaining a score over 750 is quite an accomplishment, and you should use it to your benefit. With a score of 780, you deserve additional perks, such as a lower interest rate and closing costs.

With a 780 FICO score, it seems to me that you shouldn’t have to pay a lot of points and/or fees to refinance your loan. Ask your lender the following questions:

• Why your closing costs are so high? I don’t know the balance you’re refinancing, but you might find you can get a reduction in the closing costs simply by asking. Closing costs are negotiable.
• How many points are you charging?
• Why are you charging points?
• Are you charging a loan origination fee? If so, how much?
• May I see a Good Faith Estimate? You shouldn’t have to ask, but if you’re lender has not provided you with a Good Faith Estimate, ask for one. It should provide a detailed breakdown of all costs associated with the loan.

The standard score to avoid fees in the market today is around 740. You’re at 780, so you shouldn’t be forced to pay a lot of fees. The interest rate seems to be in line with the market trends, but the more points you pay the better your rate should be, make sure that’s the case. The industry is trending toward larger percentage drops for points paid. This means that paying a point years ago might have reduced your rate by ¼ % (.25%), but in today’s market that same point might reduce your rate by 1/2% to 2/3% or more (.5% - .67%). Just make sure you’re asking the questions to find out what your points are buying you.

Using your monthly savings of $400.55 per month, it will take you over 19 months to recover the closing costs at $7,700. So, yes you’re saving $400 per month, but is it costing you more than that savings is worth? If you roll the closing costs into the loan, it will take you even longer to recoup that amount because there will be interest assessed. You have to make this decision for yourself, but if you’re planning to stay in your house for a while then it makes more sense because all the savings after the 19 month period will go straight into your pocket. It’s a cost-benefit analysis, plain and simple.

Shop the loan. Get a second or even third opinion on the rate, term, fees, closing costs, etc…. Don’t accept the first loan your offered. Don’t tell the other lenders what you’ve already been offered. Have them give you an independent quote. Tell the loan officer that you’re comparing loans before you decide which one to accept, so he or she should come up with their best and most competitive loan available. Then sit down with the loan offers you’ve received and compare them. If you have an accountant, attorney or other trusted advisor, consider sitting down with them to help you compare the loans’ pros and cons. Go with the one that benefits you the most. Please let me know how it goes. I’m very interested to see what the final loan looks like and what you were able to save.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)