With rates at all time lows, now may be the time for owners to explore refinancing or modification options

Now is the perfect time for owners to explore the refinancing or modification of their existing mortgages for their properties. Rates are at an all time low, albeit, to get one, your lender may have you jump through a hoop placed on top of the tallest building in your city. The first thing you should do is to review your current loan documents and ascertain your current interest rate. Is the rate fixed or adjustable? If it is adjustable, when are you due for your next bump? Will you be charged any pre-payment penalties? A common prepayment penalty is one where you would pay a penalty to the lender depending on what year of the mortgage cycle you are in. Another current, common pre-payment penalty uses a 5-4-3-2-1 pre-payment formula. That is, in years 1, 6, and 11 (of a 15-year loan), the pre-payment penalty is 5% of the principal balance. In years 2, 7, and 12, a 4% penalty is incurred. The penalty reduces each year, down to years 5, 10, and 15 where it is 1%. Do not forget to follow the document instructions on advance notice should you be paying off the loan when getting a new one. Bear in mind, anything that is to a lender's advantage or gives them more money will be strictly enforced. You can "take that to the bank." Contact your current lender to see if they will modify the existing loan (hopefully) rather than force you to re-finance. Then contact other lenders to see what their loan terms and conditions would be. You may prefer to use a broker. With all of the information now available to you, you can compare apples to apples. Carefully review with your financial people the monetary effect that a modified or new loan may have on your payment schedule. Keep in mind, on a 15-year fully amortized loan, it takes about eight years for that loan to result in a 50/50 equal split in the allocation of your payment, where half the payment is applied to interest and half to principal. On a new loan, around 95% of the first payment is applied to interest and a small amount to principal reduction. So, to seemingly save on monthly payments, only to extend the number years that you have to make payments, may not make financial sense. Some additional factors that you should incorporate into your decision making and whether to seek a modification, or an entirely new loan include: A) Your closing costs, which include everything from application fees to potential mortgage taxes ( New York City recording tax can run as much as 2.85% of the amount being borrowed), to the cost, potentially, of a new environmental (phase I) study plus title insurance fees, search fees, escrow fees on through to the lender's attorneys fees. They add up quickly! B) Your potential legal fees; C) Mortgage broker fees; D) Whether or not you can or wish to take cash out of the deal; and E) Whether or not the new lender would take your current mortgage by assignment thereby saving you potential mortgage or other taxes. Your own professionals will undoubtedly have other factors for you to consider. Once you have all of the information, you must do a comprehensive evaluation, probably best undertaken by your financial people, comparing the cost of staying with your current lender even at a higher interest rate as opposed to using a new lender and paying additional costs as part of a new loan. Yes, your monthly payment may be reduced and yes, your lender may permit you to include the closing costs as part of their loan package but is the additional long term cost to you worth the monthly payment reduction? Once you have done a full comparison you will be in a position to do the deal that is best for you. Howard Stern, Esq., is the owner and an attorney at Law Offices of Howard Stern, White Plains, N.Y.