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Pay attention to smart ways to refinance, FPA says

As the candy and flowers keep trickling in for our new Fed chief, it’s possible he might not return the favor. In his first congressional testimony last February, Federal Reserve chairman Ben Bernanke said the economy had snapped out of a year-end lull, but as a result, rising inflation — and rising interest rates — might still happen.

Of course, whether rates are headed up or down, it makes sense to know the most cost-effective ways to negotiate a refinancing deal for an existing mortgage. One important point to realize — mortgage volume is down as rates have gone up, and lenders need your business.

Dispose of as much debt as you can

Obviously, getting the best rates are based in part on the debt level you’re carrying now. Try to pay off as much high-rate debt as you can before you begin the process.

Make sure your credit reports are clean

Before you start applying to refinance, make sure your credit reports are free of errors. This will take at least a month of time, so the best strategy is to plan the process ahead of time.

Start with your goals

If you plan to stay in a home for a lifetime, steer toward fixed rate loan options so you’re not squeezed by rate increases.

Focus on in-house fees

By now, most conventional lenders have gotten wise to the notion that most consumers can spot extraneous fees. However, that doesn’t mean you shouldn’t ask. The chief culprits — application fees, document preparation and loan-processing fees. Since most of these functions are paper-handling tasks done in house, it’s not like they’re accruing much in the way of costs. So ask if you really need to pay for work they’re not really doing.

How much does that appraiser and credit report really cost?

It gets a little tough to figure up the markup on these items, but see if the appraiser will tell you what his hourly rate is when he comes by to appraise your property. As for the credit reports, those are pretty easy — see what TransUnion, Experian and Equifax charge for more than one credit report in a year. Then ask your lender where those fees are on your statement and see how closely they match.

Make rate comparisons on level ground

Say you have an offer for a 6.5% rate with one point and another lender has the same type of loan available for 6.5% and zero points. Review the numbers yourself or consult with your financial adviser. Make sure you understand the tradeoffs and at what point in time, given your personal circumstances, one loan would be preferable over the other.

What’s Uncle Sam getting?

It might be worth a call to the city clerk’s or assessor’s office to see what they charge lenders for recording, transfer or tax-related fees, and again, double-check those fees on your statement.

Check for predatory practices

As rates go higher, conventional lenders get choosier about who they’ll work with. That pushes more people down the food chain of lenders who are willing to take on riskier business. Make sure the lender you’re working with doesn’t add prepayment penalties or erroneous fees during the process.

See if going fixed-rate makes sense

Over the past few years, many lenders have been marketing adjustable-rate loans as a way for borrowers to keep payments down and draw on home equity. However, as short-term rates have moved beyond long-term rates, lenders are attempting to get more borrowers into fixed-rate products.

Keep an eye on the rate horizon

If economic growth slows, the Federal Reserve could begin lowering short-term rates in mid-to-late 2007. There are no guarantees, but borrowers with longer-term adjustable mortgages might want to sit tight based on that scenario.

Know when to pull out of a bad deal

If you find something wrong with your refinancing deal at closing, you have three business days from the date of closing to mull it over. If you decide to reject the deal, you must notify the lender in writing within the three-day period. The lender then has 20 days to return your fees.

This column is provided by the Financial Planning Association of Mississippi, the membership organization that connects those who need, support and deliver financial planning. We believe that everyone is entitled to objective advice from a competent, ethical financial planner to make smart financial decisions.

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