Finance 101: Paying a lower interest rate is good. It's true for credit cards, car loans and mortgages. It's also true for a city that sold bonds to finance a street lights project and build a public safety building.

So, when the chance came along for Orem to refinance some of its bonds, city leaders decided to go for it. The City Council will vote on the decision to do an advance refund and get the same amount of money at a lower interest rate at its meeting tonight.

"It's all driven by economics," said Laura Lewis, a principal with Salt Lake-based financial firm Lewis, Young, Robertson & Burningham, the city's financial adviser.

The big question here is when to do it. Advanced refunding can only be done once, so timing is crucial, Lewis said.

But, Mark Thomas, director of field services for BYU's Marriott School of Management, asked why the city didn't refinance in the last few years, when interest rates were lower.

Refinancing is anticipated to knock about $175,000 off the $3.8 million in bonds the city issued in 2000. It's being done now because the interest rates are working in the city's favor, Lewis said. Here's why:

When a city refunds its bonds in advance of the 10-year call deadline, the money to pay the bonds off is put into escrow and invested in treasuries, which are low risk and low return. The city could have gotten a lower interest rate on its new bonds before now, but the money in escrow used to pay off the initial bonds would be earning about 1.5 percent in interest and paying off a loan with 5 percent interest. Now the interest rate on the escrow account is higher.

"What's very beneficial now is that the yield curve is very flat," Lewis said.

Refinancing and keeping the same maturity date of 2018 will drop the interest rate by half a percent or 1 percent, thus resulting in the net savings. That means the city will save about 4 percent over the life of the bonds.

"Generally we like to see at least 3 percent," City Manager Jim Reams said.

If the question of refinancing is purely for cost savings, as Orem's is -- no terms of the bond are changing except for the interest rate -- the only real factor is the net savings. Thomas said the city would need to look at future cash flow in today's dollars minus costs.

"If that's positive, then that's a good thing," he said.

The concept of refinancing or refunding a bond is similar to a homeowner refinancing his mortgage to take advantage of lower interest rates, although there are some differences. The major difference, Reams explained, is with a mortgage you essentially pay off the entire loan, then take out a new one at a lower interest rate.

"These you pay part of the bonds off, but not all of them," he said.

Heidi Toth can be reached at 344-2543 or htoth@heraldextra.com.

This story appeared in The Daily Herald on page D3.