When To Refinance Your Home?

With interest rates sitting just below 4 percent, now is a great time to crunch the numbers and see whether refinancing your mortgage can save you money.  As a general rule, homeowners will probably come out ahead when they can shave about 2 percentage points off of their interest rate.

If you have an adjustable-rate mortgage (ARM) or an interest-only loan, you might also benefit from refinancing, even if you don’t save money on the monthly payments.  That’s because you can lock in a 30-year fixed-rate mortgage at today’s historically low rates and never have to worry again about your payments increasing.

Think you’re a good candidate for refinancing?  Despite reports of banks hoarding money, lenders are still making loans.  But it has become harder to qualify for one.  Here’s a road map to help you navigate the new and ever changing mortgage terrain.

“If you want access to the lowest interest rates, you need a credit score of 720 or higher.”  If you have a score of 620 or below, you might not qualify for a loan at all.  Credit scores range from a low of 300 to a high of 850.

You’ll need at least a 10 percent equity stake in your property to refinance.  And in some cases, you won’t be able to get a loan without a 20 percent stake if private mortgage insurance is hard to get in your region. That might be a problem if you live in an in area where property values are quickly falling.  You might discover that your house is valued at less than you owe on your current mortgage, making refinancing difficult.  The one exception is for people with mortgages that are owned and held by Fannie Mae or Freddie Mac.  A new program will allow homeowners to refinance up to 105 percent of the home’s value.

All homeowners will need to document their assets and income.  “Right now you have to prove you are the borrower you say you are, sometimes repeatedly.”  Lenders want to make sure that homeowners can realistically afford any debt obligations, and they’re reluctant to underwrite a mortgage if the homeowner’s overall debt load is more than 43 percent of the family’s income.  At the height of the housing boom, acceptable debt ratios reached as high as 55 percent.

Refinancing isn’t an option for the millions of Americans who need to lower their monthly payments the most those who have lost their jobs.  Banks won’t make new loans to such people until they can show pay stubs from a new job for at least 30 days.  A jobless homeowner’s only option might be one of the new government programs for distressed folks, but they are usually available only to those who are at least 90 days delinquent on their payments.  And while it might be tempting to stop mailing in your check, know that your credit score will take a serious hit if you stop paying your mortgage.

In the past, you might have been able to refinance without paying any points and fees, but today that’s often not the case.  Now that Wall Street is no longer securitizing smaller mortgages, the vast majority of conforming loans (those valued at $417,000 or less in most areas and $729,750 in high-cost areas) are sold to government-sponsored entities Fannie Mae and Freddie Mac.  About a year and a half ago, they started charging borrowers additional fees.  The first one you’ll encounter is called an Adverse Market Delivery Charge, and it could add as much as a quarter of a percentage point to the loan.

Fannie Mae and Freddie Mac also charge a fee called the Loan Level Pricing Adjustment, which takes into consideration your credit score and loan-to-value ratio, or how much home equity you have.  Someone with poor credit and very little equity could end up paying an additional 300 basis points in fees.  So if you were borrowing $100,000 and had to pay 3.25 percentage points in fees, you’d owe the bank an additional $3,250 in closing costs.  If you wrapped the fees into the mortgage itself, you’d end up paying a 4.25 percent rate over the life of the loan.

Interest rates used to be fairly similar from one lender to another, but now they can vary by as much as a percentage point.  And some of the most competitive interest rates are found at the smaller community banks and credit unions, which might be better funded than some of the larger players that got caught in the sub-prime debacle.

Make sure you don’t limit your shopping to a single bank or mortgage broker.  Some of the larger lenders, including Chase, no longer allow brokers to sell their products.  So if you want to see all of the rates in your area, you’ll need to pick up the phone and do some calling around yourself.

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