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Dave Olson, Published March 16 2012

Savings adding up for many who rework their home loans

FARGO - In more than 30 years of loaning money, Ron Jordan has never seen interest rates so low.

In fact, he didn’t think it could happen.

“I never, ever thought I’d see 3.75 percent, 30-year fixed and 3 percent 15-year fixed (loan rates). I just never thought in my life I’d see that,” said Jordan, senior vice president for real estate at State Bank and Trust in Fargo.

But, seeing is believing for area homeowners, and many have decided now is a good time to refinance.

For Jordan, that has meant that about 70 percent of the work done in his office over the past two months involved loan refinancing.

Some people are switching from a 30-year loan to a new 30-year loan to take advantage of lower interest rates, but the majority are moving from 30-year to 15-year loans, he said.

Situations vary widely based on a client’s credit rating and the value of their home, but Jordan sketched out the following rough numbers for what can be achieved with refinancing.

On a $200,000 mortgage, which is fairly common in this area, someone five years into a 30-year fixed-rate loan who switches to a new 30-year loan could save about $20,000, given a 1.75 point difference in loan rates.

Going from a 30-year loan to a 15-year loan with a 2.5 point difference in loan rates could save a homeowner about $100,000 by the time the loan is paid off.

The latter setup would mean a higher monthly payment, perhaps in the neighborhood of $180 more.

Wendy Clarin didn’t hesitate when her bank contacted her last fall and suggested she might want to consider refinancing the loan she secured when buying her West Fargo twinhome in 2002.

Clarin swapped her 30-year loan for a 15-year loan.

Her anticipated net savings?

About $16,000.

And there was another advantage to making the change, Clarin said.

“I’m building equity faster.”

Al Lerberg, who grew up in Fargo and now lives in Elk River, Minn., recently refinanced a 30-year fixed loan at 5.5 percent down to a 15-year fixed loan at 3.75 percent.

“The paperwork trail was a mile long covering every piece of financial history we had in the house and then some,” Lerberg said.

“In the end,” he added, “the company we used were good for their word, and the closing was simple and all went according to plan.”

Lerberg said he expects to save between $20,000 and $50,000 as a result of the refinancing.

His monthly payments went up $120 or so, but “we had the funds to cover the increase,” Lerberg said.

Deciding whether refinancing makes sense depends on several factors, Jordan said.

He said if the cost of refinancing can be recouped in a year or two, there’s little question someone should go for it.

If the payback period is closer to four or five years, a person should think about it a little bit more, he said.

Homeowners should pay close attention to refinancing costs because they can sometimes be hard to see, depending on how the deal is arranged, Jordan said.

He said the simplest way to weigh the cost of a loan is to look at the annual percentage rate, or APR, because it reflects the base rate and any additional fees and costs.

So, how long will interest rates remain attractive for those thinking to refinance?

No one knows, Jordan said, but he added that Federal Reserve policy appears aimed at preserving low rates through at least 2014 as a way of keeping the economy moving.

“Nothing can stay down forever, but we’re hoping the next two years we’ll be in the same rate scenario, or close to it,” he said.

Readers can reach Forum reporter Dave Olson at (701) 241-5555