To “Re” or Not to “Re”: Is It A Good Time to Refinance?
Linda and Dan bought a house they love six years ago, big enough to accommodate their growing family (twin girls). They just refinanced their 6% rate and got 4.875%, which will save them a cool $375 a month in mortgage payments. They’re among the millions of Americans taking advantage of lower rates to make their mortgage payments more affordable right now.
Current rates may be great, but does that mean everyone should refinance? Just because a lender is willing to lend you the money doesn't mean that it's a good idea or that you can actually afford the loan, especially if your circumstances change, such as a job loss. Weigh these factors to decide if it’s the right move:
If home prices where you live are still declining, don’t drag your feet waiting for them to drop still farther. If you wait too long, along with falling rates, your home’s value could dwindle so much that you might not qualify for a refinance.
Homeowners who owe more than 105% on their home’s current market value are not eligible for refinancing. To qualify for the stimulus, Fannie Mae or Freddie Mac must own or guarantee your mortgage. In those cases, it is required that your equity in the home add up to at least 10%.
The high cost of lower costs
Refinancing involves similar closing costs to those when purchasing of a new property, which means that sometimes lowering your rate a few tenths of a percentage may not be worth the expense.
If you decide that refinancing is worthwhile for you, here’s how to get started:
Make sure your credit’s in order
You'll generally get the lowest rate on loans backed by Fannie Mae or Freddie Mac -- together they back about two-thirds of all mortgage loans -- if you have a high credit score and equity of 20% or more. See the article above for tips about what lenders look at; for refinancing they’ll use the same criteria as for a first mortgage. Get credit tips for mortgage refinancing
Do your due diligence
For a refinancing application, you’ll need to show pay stubs from a recent month, two months of bank and other financial statements, two years of W-2s and, if you're self-employed, two years of tax returns showing reliable income.
You can take additional measures to speed up the process, such as paying for an appraisal (about $350) ahead of time.
Lock and load
Locking in a rate will ensure that even if you’re straining to afford your mortgage, rising rates won’t set you back. Loans take so long to process that there’s a real risk that they may rise before the deal closes (refis are taking an average of 60 days to close with lenders’ staffs shrunken as a result of the economic downturn). Homeowners looking to refinance, however, face a bit of a dilemma: refinance now and miss out on the possibility that rates will drop even further, wait and miss out on record lows, or discover they are unable to refinance altogether.
If you’re offered a significantly lower rate than everyone else, look for a catch. These lower rates may come with shorter lock-in periods, some as short as 21 days, and with a surge in applications, it may take well over four or five weeks to close on a loan. Bottom line: make sure you know how long it will take to process the loan and make sure the rate lock is longer.
Now go out there and grab those rates before they’re gone!
Now that you know if it is a good time to refinance, get your Credit Report and Score.