SMART WAYS TO REFINANCE YOUR HOUSE
By Terence P. Pare

(FORTUNE Magazine) – Sometimes procrastination pays. If you've dawdled in refinancing the mortgage on your Tara, you can lock in interest rates that have dropped lower than Rhett Butler's morals. Today 30-year fixed-rate loans average 7.3% nationwide -- a full percentage point beneath last year's, and near a 20-year low. Who should refinance? Just about everyone who doesn't have a for sale sign on the front lawn. Even if you purchased or refinanced recently, you may find a better deal if you shop around. According to Ernst & Young, for a typical mortgage that involves refinancing costs of 1% of the total loan, if you can lower your interest rate by a single percentage point, the new loan will put you ahead after just 18 months. The best mortgage will be the one whose term most closely matches the time you expect to keep your house. Bankers offer floating-rate mortgages that guarantee an initial low interest rate for periods ranging from three months to seven years. If you expect to pack up and move soon, grab a 4.4% one-year adjustable rate mortgage (ARM). Such loans, of course, carry risk: When interest rates go up, so do your monthly payments. If you plan to stay put long enough to raise a family, say, the choice is subtler. Thirty-year fixed-rate mortgages still account for the lion's share of home financing. But lately banks have been pushing 15-year fixed-rate loans. Such loans have powerful emotional appeal: They carry interest rates about a half percentage point lower than 30-year mortgages and enable borrowers to own 100% of the house sooner. What's more, over the life of a 15- year loan, you will pay far less total interest. If you get a $150,000 30- year mortgage at 7.3%, for example, you will pay $229,208 in interest over the life of the loan. A 15-year mortgage at 6.8% would cost less than half that -- $89,612. But is the 15-year loan a better investment? Not really. The difference in monthly payments -- $1,028 for the 30-year loan vs. $1,332 for the 15-year -- is $304. Suppose you opt for the longer-term loan and invest that sum each month in the stock market, where it earns 7% after tax. (On average, stocks have earned 10.3% a year before taxes since 1926.) Suppose you also invest the extra tax savings generated by your loan. Because the loan amortizes more slowly than a 15-year mortgage, interest, which is tax-deductible, makes up more of your monthly payment. While the payment itself is less than on a 15- year loan, the amount of interest paid is greater, and so is the tax benefit. ! In ten years, as the chart shows, the 30-year loan will begin to assert its financial superiority. The holder of a 15-year loan would still owe $67,566 in principal; the holder of the 30-year loan would owe more, $129,675, but that debt would be partly offset by the value of the investment nest egg. By the end of 15 years, the advantage would be substantial: The holder of the 30-year loan would have earned enough on his investment to pay off the remaining debt on the house and still have some $10,000 left. ONCE YOU CHOOSE a mortgage, you'll have to make a decision about refinancing costs: Should you cover them at the outset, by paying points, or spread them over the life of the loan by accepting a somewhat higher interest rate? A typical choice you might face in borrowing $150,000 for 30 years: Either pay three points, or $4,500, and get a 7 1/8% interest rate, or pay $51 more a month for a no-point loan with a 7 5/8% rate. ''You are almost always better off not paying points,'' advises Ralph Massella of Waterfield Financial, a Fort Wayne, Indiana, mortgage bank. If you pay the points, your $51 monthly saving will add up to $4,500 in about 7 1/3 years. If you subsequently invest that monthly $51 and earn an average annual return of 7%, you would accumulate $30,000 by the time your house was paid off. Not bad. But suppose you opt for the no-points mortgage and invest the $4,500 right away. After 30 years, you'd have a nest egg worth $34,000 -- a $4,000 advantage.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: ERNST & YOUNG CAPTION: HOW A 30-YEAR MORTGAGE CAN BEAT A 15-YEAR