Should You Refinance? A Brief Primer to
Help You Make This Potentially Money-Saving Decision
by www.SixWise.com

U.S. homeowners refinance their mortgages an average of once every four years, according to LendingTree.com. However, long-term interest rates have sunk to historic lows, making a great lot of us wonder, “Should I refinance?”

Just how low are interest rates?

A 30-year fixed rate is hovering around 5 percent, and is expected to stay that way for the remainder of the year, or potentially rise a bit to 5.25 percent, Keith Gumbinger of financial publisher HSH Associates said in a Yahoo Real Estate article.

According to an HSH survey of lenders, the national average 30-year fixed rate was at 4.97 percent as of the beginning of May, while the average 15-year fixed rate was 4.68 percent and the average 5/1 adjustable-rate mortgage (a rate that's fixed for five years, then changes every year after) was 4.91 percent, Yahoo Real Estate reported.

Clearly, you can get a great deal on interest rates right now, but there’s more to refinancing than just interest rates.

Six Factors to Consider Before a Refinance

The typical refinance costs homeowners about $2,000, so you need to figure out whether the savings you receive in interest, removing mortgage insurance or other savings will pay off. Further, standards to qualify for a new mortgage are stricter than they’ve been in the past. So here are some factors to definitely consider:

1. Will you be moving in the next few years? If so, refinancing will probably not help as you won’t have enough time to recover the costs.

2. Do you have an adjustable-rate mortgage (ARM)? ARM loans can skyrocket at any time, and without warning. So refinancing into a fixed rate is a smart move, even if it doesn’t save you much on your monthly payment.

3. Is your interest rate high? If so, you may benefit by taking advantage of the low rates, but again only if you’ll be in the home long enough to recover the costs.

4. Are you having trouble making your monthly payment? Then you may want to refinance to secure a lower payment.

5. Has your credit rating improved? A higher credit score means you may now qualify for a lower interest rate than you had before.

6. Is your home equity over 20 percent? If you had a down payment of less than 20 percent when you obtained your mortgage, you’re likely paying Private Mortgage Insurance (PMI) to the tune of $100 a month or more. If your equity is now above 20 percent, you can ask your lender to cancel the mortgage insurance, or alternatively refinance and get a new mortgage without it.

Will You Qualify for a Low Rate?

For loans backed by Fannie Mae or Freddie Mac (which together back two-thirds of all mortgage loans), you’ll get the best rate if you opt for a conforming loan, have a credit score of 720 or higher and also have equity of 20 percent or more.

If you don’t qualify for the lowest rate, you can pay points at closing to reduce your rate; paying one point will lower generally lower your rate by 0.25 percentage point.

Further, for loans backed by Fannie and Freddie, you must have at least 5 percent equity in your home (for a primary property). You can get an FHA loan with equity of just 2.25 percent. Either way, however, if you have less than 20 percent equity you’ll need to get PMI.

Refinance Options if You Need a Lower Payment NOW

There are options for those of you looking to refinance not necessarily to snag a lower interest rate, but simply to secure a mortgage payment you can afford.

1. The Home Affordable Program: A new program just announced this March, it offers homeowners who owe more than their home is worth a lower market rate of interest that’s fixed for at least five years. To qualify, your home must not exceed the value of your mortgage by more than 5 percent, and you must have a loan backed by Fannie Mae or Freddie Mac. For more information, visit www.makinghomeaffordable.gov.

2. The Hope for Homeowners Program: If you’re in foreclosure or bankruptcy or at risk for default, this program helps you refinance into an FHA-insured loan that you can afford. For borrowers who refinance under Hope for Homeowners, lenders will be required to "write down" the size of the mortgage to a maximum of 90 percent of the home's new appraised value. In many instances, lenders will determine that such a reduction in principal will allow them to avoid a costly foreclosure, while helping borrowers stay in their homes. For more information, visit the Hope for Homeowners Website.

Steps to Take From Here

To further define whether a refinance is right for you, you can compare costs vs. benefits using Bankrate.com’s refinance calculator. Also has a refinance worksheet that is helpful.

From there, contact several lenders, including credit unions and local banks, and mortgage brokers to see who can get you the best rate at the lowest cost. And remember, nothing is set in stone when you first make the call. So before you sign on the dotted line, shop around and do the math to find out if refinancing truly is right for you.

Recommended Reading 

10 Top Tips to Save More of Your Money

Reverse Mortgages: What Exactly Are They, Who Are They Best For?

Sources

Yahoo Real Estate May 15, 2009

LendingTree.com March 16, 2009

WSJ.com January 12, 2009