Lenders offer mortgage deals in an effort to keep customers

A community lending consultant with Operation Hope holds A community lending consultant with Operation Hope holds a brochure offering help to people having trouble paying their mortgage, during a foreclosure event held at the California Science Center in Los Angeles. (Nov. 30, 2007) Photo Credit: AP

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Question: My lender contacted me with an offer to lower the interest rate on my mortgage. I'm hesitant because the deal just looked too good to be true. My current interest rate is rate 5.6 percent and the new rate they are offering me is 4.125 percent with no closing costs.

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What questions should I be asking?

Answer: Sometimes when a deal seems to be too good to be true, it is. But in your case, this sounds like the real deal.

Mortgage lenders are trying to cherry-pick their own clients. Mortgage interest rates are so low (still hovering at historic lows, as we write this) and there is so much chatter about refinancing (in the media and at the water cooler) that the average borrower who normally pays no attention to mortgage interest rates is now considering a refinance.

Your lender is thinking that if you refinance with them, then you're not refinancing with someone else. And if you're in good stead, that is, you pay on time, you're a valuable customer.

So the lender's calculus goes something like this: What is a low enough interest rate that would entice a current customer to do a refinance but still allows me (the lender) to make a lot of money? The answer is the deal you've been offered.

Your current rate is 5.6 percent on a 30-year fixed-rate loan. The lender is offering to lower your interest rate by 1.5 percent, to about 4.1 percent. That's a great reduction and it should save you quite a bit of money.

Before you jump at it, you need to ask yourself a few questions so that you understand what you're being offered as it compares to similar loans in the marketplace.

First, can you lower the interest rate even more? You're being offered a 1.5 percent drop, but that's on another 30-year loan. If you take this loan, you'll have a lower rate, but it isn't as low as it could be. Thirty-year mortgages are being offered as low as 3.5 percent, and your offer is quite a bit above that.

What could lower your interest rate further? Consider cutting the term of the loan. If you drop from a 30-year to a 15-year fixed-rate mortgage, you might be able to get a loan at around 3 percent. That would mean a 2.5 percent drop in the interest rate from where you are today. Because that drop is so steep, you might still pay less each month while shaving years off the loan term. And, that's where the real savings comes in.

We often talk about a home-run refinance. To get there, you have to lower the interest rate, lower your monthly payment, shorten the term of the loan and manage your closing costs. It sounds as though you might be just about there.

To be sure, you should shop around and see what other lenders will offer you. Then, with that information in hand, you can negotiate from a position of strength, knowing exactly what you've been offered and what is the best deal you can cut for yourself.

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