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CNN Sunday Morning
Interview With Rajeev Dhawan
Aired August 18, 2002 - 08:35 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MILES O'BRIEN, CNN ANCHOR: The mortgage business calls it "refinance fever," and it's reaching an epidemic level as interest rates dance toward 30-year lows. But will it pay for you to refinance? Rajeev Dhawan joins us. He is the director of Georgia State University Economic Forecasting Center. Good to have you with us, sir.
RAJEEV DHAWAN, GEORGIA STATE UNIVERSITY: Good to be here.
O'BRIEN: Lots of great e-mail questions. Let's get right to them, if we could, and this one comes from the Reverend Eric Hanston in Stillwell, Kansas: "My current mortgage is at 7 percent fixed," he says. "Should I refinance now? In other words, at what point is it a good idea to refinance -- to save .5 percent, or 1 percent or...?"
DHAWAN: Well, that depends upon his fees and the point structure his lender is offering, but typically if it's a 30-year rate and he's getting -- he got it at 7 percent, at this point, he can get almost 6 percent. So it might pay him to refinance.
O'BRIEN: Depending on the points you have to pay?
DHAWAN: The points.
O'BRIEN: So is there a formula you use for that, or do you just have to get out your pencil and do some hard arithmetic?
DHAWAN: You have to do some hard arithmetic, and you have to go to your lender and sit down with the exact person. And he can look over your loan portfolio and stuff like that. I mean, I can project kind of like, you know, whether the interest rates are going to go down any more lower than that, how the economy is going to do, stuff like that.
O'BRIEN: All right. This one comes from Wendy Villa: "I am purchasing a new home, and the closing date is September 30. The rate I could lock in right now is 6.5 percent. My lawyer tells me it's too early, though. My mortgage broker tells me it is a good rate, I should lock it up. What should I do? I know 6.5 is great. Maybe it gets lower or higher?"
DHAWAN: Go with the mortgage broker.
O'BRIEN: What?
DHAWAN: Go with the mortgage broker. O'BRIEN: Really?
DHAWAN: It's pretty low. I doubt they're going to go any lower. They can go a little bit lower, but, you know, you can also miss the boat so you don't want to take the risk. This is probably the lowest. Go for it.
O'BRIEN: All right. We have got a phone caller on the line. I believe the name is Jack in Florida. Jack, you're on the line, go ahead.
TERRY: Good morning.
O'BRIEN: Terry (ph) in Florida, are you there?
TERRY: Yes, good morning. My question is, I have a $400 retirement fund that comes in once a month. And we have a financial investor, and he indicates that we should invest it. We're still continuing investing, but my thought right now is maybe I should go ahead and take that $400 and put it toward reducing the principal on my mortgage. I still have 23 years left on my mortgage. And I was wondering what his opinion was on that.
O'BRIEN: All right. What's the theory on paying down the principal? Should you always do that, or should you put that money elsewhere?
DHAWAN: That depends on your rate of return. If you think you can really make 6 percent to 8 percent in the stock market right now, then you shouldn't pay down the principal. But if you think you can't, then you should pay it down.
O'BRIEN: These days?
DHAWAN: These days I think you should.
O'BRIEN: That's a very open question, yeah.
All right. V.P. Nathan has this: "When you refinance, is it better to take the equity out as cash if we need it, or just leave it as is?"
DHAWAN: Depends on the purpose. If you're trying to start a new business or you're trying to send your kids to college, something that's what I call investment, then you should take it out. If you're just going to on a cruise to the Bahamas, I don't think that's a good idea.
O'BRIEN: OK. So it's got to be a useful, constructive purpose. Something that could be worthwhile doing that.
DHAWAN: Right, so you can pay back.
O'BRIEN: All right. "Many folks will take advantage of the low interest rates, but many banks -- I work for one of them -- can make up the difference in other ways. It would be helpful to have someone break out the additional fees and their industry names and layman terms to help folks shop around for the actual best deal." This is from Tim Farina, who is president of a company there.
That is the question. Points, there are all kinds of fees involved, attorney's fees, closing fees. What's the best way to become savvy on that?
DHAWAN: I think these days you can use the Internet to get a lot of good quotes. You know, there are a lot of companies that are out on the Web. You can go in there, punch in your information, see what you're getting, arm yourself with that, and then go to a real human live lender, if you want to, and figure it out with them. You got to do your homework.
O'BRIEN: All right. But ask those questions, what are those fees going to be, very specifically, right? Don't be afraid of that?
DHAWAN: Right, don't be afraid.
O'BRIEN: All right. Here is one for you: "Is it better to get a mortgage directly from a bank or from a mortgage broker? Also, what are the approximate closing costs for a studio in a one-bedroom condo?"
I'm not sure we can answer the last question.
DHAWAN: I don't think so.
O'BRIEN: That varies quite a bit. But what about mortgage broker versus banker?
DHAWAN: I think it shouldn't make any difference, because, in the end, all the loans are securitized and sold off to Wall Street, so the broker or the bank are just the intermediary in between. They can only offer you the best of what the lenders are giving to them.
O'BRIEN: All right. Don Wilbur has this one: "We have an adjustable. This year's rate is 5.25. A balance of $125,000. Have about $475,000 in equity after about 17 years" -- good for you, sir. "Would like to do an extensive remodel for about $200,000. Should we get a line of credit that converts to a new first mortgage after construction, or should I refinance now with a 15-year fixed mortgage for 350K."
DHAWAN: A little bit tough one. I mean, the reason I would love to know is why are they remodeling it, how long do they plan to stay over there, will they have a recover rate. If they're worried about home prices going down in the neighborhood, then maybe they have to look at that aspect. But this is they have to go to a financial planner and figure it out.
O'BRIEN: All right. We've stumped him so much -- just for lack of information, we should point out.
"I bought my house about a year and a half ago, paid 2.5 points. Have a 30-year fixed mortgage rate at 6.375, no PMI. Is it worth possibly looking into getting a 15-year fixed loan? I currently have a mortgage of $140,000. We pay approximately 250 extra on principal as well. What are your thoughts?" That's from Tom in Allentown. I've heard before people say, get a 30-year note and just pay the extra principal, as he is doing as opposed to getting a 15. What are your thoughts on that one?
DHAWAN: Same thing. It depends on the person's risk profile. You know, I think a lot of these questions are becoming like, they should be going to like a broker and trying to figure out, you know, what they need. As an economist, I can say one thing, is that, you know, if you prefer to pay down the principal fast, you have to look at your alternate rate of return, and that's where the whole key is.
O'BRIEN: So consider what you could do with that extra money, where could you put it, what could you make on it, is it going to exceed the interest rate you're paying. Of course, you got a tax implication there because you can deduct that. So you probably should do that after tax, right?
DHAWAN: Right. That's why they always say that 30-year loan pays out the best because you get to deduct a lot of interest. But if somebody has a lot of extra cash, wants to get rid of it, and wants to put it into the home equity, that's a great opportunity.
O'BRIEN: These are the problems we all want. Emmett Worick has this: "I'd like for someone to explain to me why we get so little interest on savings in the banks. It seems that if mortgage interest goes down, so does the interest on savings."
True?
DHAWAN: To some extent, they usually go hand in hand, but not exactly. The short term rate is determined to some extent by the Federal Reserve Bank initially and then by the market forces. The long-term rate, which determines the market rate, is also determined by what's happening in the economy. They usually move hand in hand. When the Federal Reserve Bank cuts the rates, like Greenspan would cut the rates, the long terms may come down, or may not. So that's the issue.
O'BRIEN: All right. That's an economist going out on the limb, saying may or may not.
DHAWAN: No, no, no. I was talking theoretically.
O'BRIEN: All right, Rajeev, I didn't mean to take a cheap shot at economists. Thank you very much. We appreciate your insights. We got lots of good questions from all of you, as a matter of fact, and we appreciate those as well. Thanks for participating in the program. Take care.
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