To refinance or not to refinance?

Should you join the crowd?

If you have top-notch credit, and expect to stay in your home for several years, refinancing may make financial sense. You probably won’t have any difficulty getting a loan, provided you have adequate income that you can document.

But for everyone else, the calculations have become increasingly complicated. And you’re unlikely to qualify for the lowest advertised rates.

Borrowers now need to clear a number of hurdles that didn’t exist the last time they applied for a loan.

One of the big factors in determining whether refinancing pays is how long you expect to remain in your home. If you expect to stay for less than two years, you’re unlikely to recoup your closing costs.

It’s probably worth running the numbers if you expect to shave your rate by one percentage point. But, in some cases, that old rule of thumb doesn’t necessarily apply.

People with larger mortgages can benefit from smaller rate reductions, brokers say. Smaller reductions may also make sense if you expect to stay in your home for many years.

Of course, you also need to factor in the costs of achieving that rate. Some borrowers pay points, or a fee, to lower the mortgage rate. Points are expressed as a percentage of the loan amount.

Before you begin tinkering with the many refinancing calculators on the Web, be sure to keep the following in mind:

Consider your reasons

First, think about why you want to refinance.

Lowering the overall amount you’ll pay over the life of the loan is an obvious one.

But in today’s economy, many people are simply trying to save a couple of hundred dollars a month to improve their cash flow (and they don’t care if refinancing will raise their overall costs in the long run).

Other people want to get out of riskier loans, like adjustable-rate mortgages.

This is also a good time to reduce the term of your loan. For instance, if you’ve been in your home for a decade, you may consider refinancing from a 30-year fixed mortgage into a 15-year loan.

Not only is the rate even lower on a 15-year mortgage, but you will be able to pay off your loan earlier and your payment may be about the same as you’re paying now.

That strategy may work well for people nearing retirement.

Be realistic

Only borrowers with good credit scores who are borrowing less than 80 per cent of their home’s value are likely to get the best rates.

Shop around

There are huge variations in mortgage pricing across lenders. Since rates change daily and vary by lender, it pays to do your rate shopping on the same day to perform a valid comparison, said Professor Jack Guttentag, professor of finance emeritus at the University of Pennsylvania’s Wharton School, who runs the Web site mtgprofessor.com.

Rate locks

Given the high volume of applications, it’s also important to ask the lender when the loan will close – and what happens to your rate if the loan fails to close before your rate lock expires.

Such locks typically guarantee your loan pricing for 30 to 45 days.

Get your rate lock in writing. Rates aren’t expected to rise anytime soon, but even if they move only slightly higher, it can diminish the benefits of refinancing.

Rate locks can cost money, so factor this into your cost comparisons across lenders.

Understand the rules

You will also need to document your income fully, and you can expect lenders to check it vigorously too – something they didn’t do previously. “Every data item is being verified at least once,” said Ms Christine Clifford, vice-president of Access Mortgage Research and Consulting.

If you’re looking to refinance a jumbo loan, you need to have superior credit and a sizable amount of home equity.

“You have to provide income verification and the bank wants to make sure you have reserves or liquid assets in the bank,” said Mr Bob Moulton, president of Americana Mortgage Group, a jumbo broker in Manhasset, New York.

That means three to six months of mortgage payments and insurance.

Source : Today – 13 Feb 2010