Local mortgage expert advises parents to refinance their home loan

Q: I saw recently that the Federal Reserve cut the federal funds rate for the third time since September. This made me think of my parents and whether they should think about refinancing their 30-year fixed-rate home loan. I believe their interest rate is about 7.5 percent. What are the general guidelines for refinancing a mortgage?

-- Dawn C., Henderson

A: That is a great question, especially since we have been hearing so much lately about the recent rate cuts. There is more to know, however, than just what you hear.

To get you the most complete answer, I will turn to Norbert Gyorfi, a lender here in town with a major mortgage brokerage. Here is what Norbert had to say:

"I tell my clients that a good rule of thumb is that you should refinance your mortgage if and when current market rates are at least 1 percent lower then your current interest rate. Doing so will save you thousands of dollars over the life of your loan.

So, given that your parents have a 7.5 percent interest rate, and current market rates on a 30-year fixed conventional mortgage are in the low 6s, I would most certainly recommend a refinance.

With that said, there are other factors to take into consideration, like the cost of the refinance versus the time that your parents plan on keeping the new loan.

To evaluate whether paying the closing costs is worth it, you can use this simple formula. Subtract the new proposed payment from the current payment. Then take the total cost of doing the refinance and divide by the difference, or savings, you will realize from the new payment.

This will give you the number of months that it will take to make up the cost of doing the refinance. If your parents plan on keeping the new loan for at least this amount of time or more, then it is worth doing the refinance. If not, then it would not be worth it.

A point of clarification as far as the fed funds rate cuts that you've been seeing since Sept. 18. The Fed does not have direct control over long-term mortgage interest rates. The Fed only controls two target rates -- the fed funds rate and the discount rate.

Neither one controls a 30-year fixed mortgage interest rate.

The Fed's rate cut mainly affects short-term interest rates like overnight bank-to-bank loans, car loans, credit card loans, and equity lines tied into the prime rate.

You see, long-term 30-year mortgage rates are controlled by the bond markets, or more specifically, the Federal National Mortgage Association (Fannie Mae) 30-year 6 percent Mortgage Backed Security.

As a matter of fact, when the Fed cuts its rate, the opposite often happens to mortgage interest rates. They actually go up.

This is counterintuitive for most people. The reasons why are confusing and hard to explain in such limited amount of space.

However, it comes down to two main reasons: monetary inflation, and the effect a Fed cut has on money flowing between the bond markets and the competing stock market.

I hope this information helps in your parents' decision.

Thanks for offering such a good question for my last column. I've enjoyed answering such questions and look forward to turning over this space to incoming GLVAR President Patty Kelley, whose first column of 2008 is set to run in two weeks. Keep those questions coming.

Devin Reiss is the 2007 president of the Greater Las Vegas Association of REALTORS? and has worked in the real estate market for more than a decade. GLVAR has nearly 16,000 members. To ask Patty Kelley a question, e-mail her at ask@glvar.org. For more information, visit lasvegasrealtor.com.