Home refinancing can save big bucks

You may be able to save a lot of money by refinancing your mortgage.

The benchmark 30-year fixed mortgage rate has been near record-low levels for quite some time, with many experts expecting it to rise over the coming years. If you haven’t refinanced yet, it may not be too late. You owe it to yourself to consider whether refinancing makes sense now.

Refinancing is when you take out a new mortgage on your home – usually at a lower interest rate, typically decreasing the amount of your payments. You may also opt for a shorter-term (or longer-term) mortgage, which may offer somewhat higher (or lower) payments.

When you shop around for a better deal than the one you have, assess the myriad mortgage costs involved, such as the origination fee, discount points, the appraisal, the credit report, processing, title insurance and the escrow fee. You can look into available loans and interest rates at www.bankrate.com. Consider what “points,” if any, you might have to pay. A point is equal to 1 percent of the value of your loan. They’re paid up front when you close the loan.

If you can get a new mortgage at a rate 1 percentage point lower than your current mortgage, you may reap enormous interest savings over 15 to 30 years, depending on how much you borrow.

In some refinancings, you can actually increase the amount of your loan by taking out extra funds – perhaps to pay down credit card debt or make home improvements. Be careful using this “cash-out” tactic, though – your valuable home equity will be taking a hit and cash-out interest rates can be higher.

Another thing to know: It has become harder, since the subprime-lending crisis began, to get qualified for mortgages. Lenders, having made too many regrettable loans, are being pickier. It’s more important than ever to have or develop a solid credit rating. Pay your bills on time, and avoid excessive debt.

Learn more at www.fool.com/homecenter and www.quicken.com/ mortgage/refinance.

Ask the Fool

Q: What does “OTC” refer to in the financial world? – G.R., Macon, Ga.

A: OTC officially stands for “over the counter,” but today it should really be “over the computer.” Long ago, to buy or sell a stock that didn’t trade on an exchange, you would call your broker, who would then call another broker and make the trade over the phone. Then, in 1971, the Nasdaq stock market was established, offering an automated trading system. Suddenly, it was much easier to get the best price on your transaction, and trading activity could be monitored, too.

The Nasdaq stock market is the main OTC system in the United States, and it lists thousands of companies – from young, relatively unknown firms to many enterprises you’re probably familiar with, such as Apple, Microsoft, Intel, Starbucks and eBay. Thousands of more obscure OTC companies that don’t meet Nasdaq’s requirements trade separately, often with their prices listed only once daily, on “pink sheets.” There tends to be little information available about these companies, and many are volatile, speculative “penny stocks,” shunned by most Fools.

My dumbest investment

A while back, I tried to be smart. I purchased 500,000 shares of a penny stock that was trading for a hundredth of a penny per share – $0.0001. I figured, what’s a $50 bet in the world’s greatest casino going to hurt? Within a week, the company announced a reverse split and stock restructuring. I was left with 59 shares, which were recently worth $0.16 each, for a total of less than $10. To add insult to financial injury, I was charged $20 for the restructure. I should get a prize, but I’m afraid of the surcharge. – Phil, Okla.

The Fool responds: Ouch. At least you haven’t lost your shirt – just a cuff link. Penny stocks are notoriously dangerous. It’s also risky to think of the stock market as a casino.

If you carefully select shares of healthy, growing companies and hang on for a while, you’re an investor, not a speculator, and you should eventually do well overall. Cheap stocks often aren’t bargains. Berkshire Hathaway’s B shares, for example, cost around $3,000 apiece in 2006 and have recently traded above $4,300.