Mortgage rates are down and you're not going to bother trying to sell your home anytime soon. Should you spend the money to refinance and lower your payments? Can you qualify?
Those two questions can have very different answers in the current lending environment, say mortgage bankers who are fielding an increasing number of queries. Mortgage rates hovered in the 4% to 5% range for most of 2010, sparking a wave of applications.
The old formula was the 2-2-2 rule: If a homeowner owned the property for two years, planned to be there at least another two years and the new interest rate was 2 percent below the old rate, refinancing was considered practical.
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Today, lenders recommend refinancing if homeowners can save $100 or more a month and break even within a year on their closing costs. Historically closing costs have run around $2,000, but in mid-2010, secondary lenders Fannie Mae and Freddie Mac started layering on additional fees in the wake of additional regulators and reporting requirements. Homeowners also should consider refinancing to a shorter-term note, even if the payments are the same or a littler higher, because it saves money over the term of the loan.
That's the easy part to figure out. The trickier part is dealing with the new realities of the mortgage market that include:
- You won't necessarily get the same rate as a neighbor. Rates today are more like airline tickets where everybody has their own deal.
- Drive-by appraisals are no more. With home values continuing to fall, lenders want to see a detailed appraisal of your home inside and out and you'll be footing a bill of about $400.
- Don't be shocked when you see the comparable sales figures an appraiser has included. They are using sales data from the past three to six months and some of those transactions are short sales or foreclosures.
- Cash-out refinancings have become near impossible because it further depletes the equity in your home.
- Even if you don't need private mortgage insurance now, you may need it in a new mortgage because falling home values are weakening some equity positions below the 20 percent threshold.
The best candidates for refinancing are property owners who've been in their homes for at least three or four years and have never refinanced before. The worst candidates are those who bought within the last three years and with very little down payment, or who secured a subprime loan with little verification of income and credit-worthiness. In a depreciating market, they just haven't amassed enough equity and may find the rate they qualify for is, in fact, higher than the current rate, lenders say.
Lenders say an increasing number of people who can't meet Fannie and Freddie's guidelines are considering an FHA refinance, but condo owners have to make sure that their building is FHA-approved.
More than ever, refinancing is a numbers game that revolves around the equity amassed in a home and a borrower's credit score. And just because you easily qualified to buy the home or refinance a few years ago, you may not qualify under the standards now in place.
"Credit scoring has become such a huge deal with the rates [consumers] can get," said Steve Molitor, vice president of PHH Home Loans, Evanston. "The most important thing someone can do now is be monitoring their credit score."
Molitor recently had a customer refinancing his home with a very respectable credit score of 739, and found that his rate inched up ¼ percentage point because his score was not 740.
Lenders also advise customers to consider refinancing their adjustable-rate mortgages into conventional, fixed-rate products since rates have dropped.
If you refinance now [but] have five years to go under the current rate, it may not be worth it," said Kathe Doremus, senior mortgage loan consultant at Community Bank of Wheaton/Glen Ellyn. "If you've got two years left, I tell people to get out right now. Take the payment and run. With the current economic environment, I think the days of these rates aren't long-lived."
Mortgage bankers also recommend that consumers shop for a lender, starting first with the company that holds the current mortgage. Some lenders are eager to keep their existing portfolio; some aren't.
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This article was updated in October 2010 by ForSaleByOwner.com staff.