Should you refinance? Of course -- but can you?
BY TERRY SAVAGE Aug 28, 2010
Updated: May 3, 2013 12:14PM
While millions of homeowners worry about foreclosure, others are hoping to take advantage of historic low interest rates to refinance mortgages.
The national average rate for a 30-year, fixed-rate conventional mortgage last week was 4.36 percent, with no points.
Since rates have dropped even more in recent days, you should be able to get that rate with no closing costs, except for an appraisal. (If you're offered a higher rate, or told you must pay $1,800 in closing costs, your broker is making too much money!)
If you can drop your rate by more than a quarter of a percentage point, with all costs included, it certainly is worth a try.
The problem, though, is that not everyone will qualify for these advertised deals. So here's what you need to know if you're thinking about refinancing:
Who can refinance
To refinance your mortgage, you need to meet three basic criteria:
Good credit -- If your credit score has dropped below 720, you might be turned down for a loan -- or you could be forced to pay a higher rate. Your lender should check your credit score at no cost, or you can pay $15.95 at www.myFICO.com.
Equity in your home -- Falling home prices could have wiped out your initial down payment or any home equity. Before you pay for an appraisal or application fee, make sure your lender runs a free "automated valuations model" on your property, checking comparable properties in your neighborhood. Then, pay for an appraisal if your lender is reasonably confident that you have at least 20 percent equity in your home to qualify for the refi.
Income -- Even if you have good credit and equity in your home, you still might not qualify if you or your spouse is unemployed. Just keeping current on all your bills to maintain your credit rating isn't enough. You'll have to prove your earnings history for the past two years.
Which new mortgage?
Most people blindly refinance into another 30-year, fixed-rate mortgage. You can use the calculators at Bankrate.com to see how much you'll save on monthly payments at lower rates.
If you're younger, still working and need the break on monthly payments, then stick with that 30-year deal. But if you've been paying on your existing loan for a while and are getting closer to retirement, you might want to consider a 15-year loan. The rate will be about a half a percent less than on a 30-year loan, but, because of the shorter pay-out time, a 15-year loan often doesn't lower your monthly payment, and it could even increase it. Still, you'll have the security of a fully paid home when you retire. Or you can always take the 30-year loan and make extra principal payments every month.
No matter what the term of the loan, make sure that it's a fixed rate. Don't fall for any adjustable-rate loans -- even with a very low interest rate -- because those will have to be refinanced again down the road. If all this money-creation leads to inflation in the future, rates will move much higher. If instead, rates move even lower, you can always refinance again.
Cost to refi and dangers
It's not just the quoted mortgage rate you want to consider. It's the annual percentage rate, or APR, that takes fees and costs into consideration. For example, a lender might quote a mortgage rate but then charge additional "points" (each point is 1 percent of the loan amount) and fees for arranging the deal. So focus on the APR, which takes those costs into account. The quoted rate and the APR should be within a quarter point.
Also, be aware that if your loan is a jumbo loan (above the $417,000 limit for loans insured by Fannie Mae and Freddie Mac), you will likely pay a higher rate.
And be sure to ask about the total monthly payment. You might be required to put property taxes and insurance costs into escrow as part of the deal, which could increase your monthly bill.
Where to find your mortgage
There are two ways to get a mortgage -- directly from the lender or through a mortgage broker. Either way, you'll have to supply a lot of documents to prove your income and submit to extensive credit checks, as well as an appraisal of the property.
Then, after this process called "underwriting," you'll be given a "lock" on a rate for probably no longer than 30 days, during which you have to close on the deal. (If rates drop further after you lock in a rate, some lenders offer the option to "float-down" for free.)
Online matching services, such as QuickenLoans.com and LendingTree.com, allow lenders to compete for your loan deal. But you'll have to sort through those that contact you with offers.
To find a mortgage broker, you can use GuaranteedRate.com or AmericanStreet.com, or you can Google mortgage lenders in your area. But be sure to read the consumer reviews for that company on Yelp.com or Google, or check the Better Business Bureau. This is too important a transaction to trust to blind luck or rate advertisements. And that's the Savage Truth.