Why You Should Consider Refinancing

It's one of the few silver linings in this difficult real estate market. Here's why.
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By: Geoff Williams

It’s not all doom and despair out there in the land of real estate. Buying and selling houses may seem like a perfectly good way to trigger a nervous breakdown, but when it comes to refinancing, if you plan accordingly, you’re likely to emerge with your sanity intact. Certainly, the interest rates are worth looking into right now: in January, they reached a record low of 4.89 percent.

In fact, despite refinancing recently declining to a 16-year low, some mortgage brokers are reporting that they’re toiling to keep up with the potential clientele. “Our pipeline of active applications has nearly quadrupled within the past month, with 80 percent of applicants looking to refinance,” observes Kelly Quintanilla, spokesperson for Member Advantage Mortgage, an Ada, Mich.-based firm that provides home loans to members of seven national credit-union partners.

And Dave Muti, a senior mortgage planner based in Parsippany, N.J., and author of Mortgages: What You Need to Know, Strategies to Take Control of Your Financial Future, maintains that “with rates being low, everyone should be checking to see if they can improve their mortgage and monthly outlay.” He then answers the question everyone asks: “Yes, credit standards have tightened but it is not as hard as many of the news stories would lead you to believe.”

Still, if you’re considering it, it’s a good idea to get a sense of what you’re about to get into. After all, refinancing hasn’t changed that much over the last couple years -- i.e., bankers won’t first send you off to find a unicorn or make you win a talent competition in order to get a new loan -- but in subtle ways it’s harder, and more expensive, to refinance a house than it used to be.

ASK YOURSELF SOME QUESTIONS

You can save some time and disappointment if you first conduct a pre-interview with yourself before jumping on the refinance wagon. For instance, some questions you should ask:

How’s my credit score?

“If you are 740 or better, you’re golden,” says Doug deBruyn, a certified mortgage planning specialist in Seattle. “The next levels are generally at 720, 700, 680, 660, 640 and 620. You will find increased pricing for a given interest rate at these scores.”

But while 740 and above is the sweet spot -- especially if your loan will be purchased by Fannie Mae or Freddie Mac -- refinancing is worth investigating even if you have a credit score of, say, 620. Don’t get your hopes up, but Muti says “many of the local and regional banks around the country still provide mortgages with competitive rates and often lower to borrowers that can’t meet these [740 credit score] standards. In addition, you may be able to get an FHA-backed loan where rates are only about one-fourth point higher than non-FHA and you don’t need to have a good credit score, and they will provide financing sometimes as high as 96.5 percent.”

What’s the value of my home?

“This is probably the biggest issue right now,” asserts deBruyn. “You need to make sure the new loan balance will be equal to or less than 80 percent of the value of your home. Otherwise, you will be required to pay mortgage insurance, which could wipe out the monthly cost of a lower interest rate. If you happen to know an appraiser or a real estate broker, see if they can get you a ballpark value on your home. A lender may also be able to obtain a ballpark value for you. It’s possible to go much higher on the loan-to-value ratio, but it should make sense for you to do so.”

How long have I been at my job?

If the answer is less than two years, know from the outset that the hill you’re about to climb is going to be steeper.

Why do I want to do this?

If you want to refinance in order to take cash out, experts generally agree: Now is not the time, especially in this economic climate. Mike Nosanov, a financial expert with JustAnswer.com, speaks for a lot of people when he says, "Don’t 'cash out' in this market. Instead, only refinance if you can reduce your interest rate enough." In other words, you should only do this if refinancing is going to significantly lower your monthly payments.

What will I gain by doing this?

Typically, most experts agree to shoot for reducing your interest by at least one point; if someone tries to convince you that it’s a financially wise move to spend thousands of dollars in closing costs to bring your 6.5 percent interest rate down to 6.25 percent, this is probably not someone who is looking out for you (run for the nearest exit). Nosanov also adds that you should only consider refinancing if you plan to be in your house at least another 18 months to two years, explaining: "It almost takes about that long for the monthly savings from the lower interest rate to offset the transaction costs of your refinance."

GIVE YOUR PAPERWORK A HUG

Embrace your inner accountant, because you’re going to need to find every bit of paperwork that shows the worth of your house and what revenue you and, if you have one, your spouse are contributing to your budget. Locate the following documents to submit to your lender:

  • The past two years of W-2 statements
  • 30 days' worth of pay stubs
  • The most recent two months of all bank accounts, retirement accounts or other significant holdings
  • Copy of driver’s license
  • Copy of Social Security card
  • Proof of homeowner’s insurance

TAKE A LOOK AT YOUR CALENDAR AND BANK ACCOUNT

Granted, if you’re going to refinance, you want to do it as soon as possible, in case rates go up. But at the same time, if you’re planning a wedding that’s going to happen soon, if your baby’s due any week now or if this is just a really busy period in your life, remember that time doesn’t stand still when you’re refinancing.

"Most rate locks are only good for 30 days," says Neil Viotto, executive vice president of Mortgage Express LLC, in Cedar Knolls, N.J. “With the current market, underwriting now takes about 10 business days. Keep this in mind when trying to calculate a closing schedule."

That’s not the only thing you should be calculating. As the rates have gone down, the fees have gone up -- like loan origination, title insurance, underwriting and document-processing charges. Typical closing costs for any mortgage, whether refinanced or a completely new one, have been around $3,000 and can run as high as $4,500. And because the lender can’t always know what these fees are in the beginning, you should ask for a “good faith estimate,” which they’re required by law to provide within three days. Generally, those fees are often still rolled into the loan (which makes the monthly payment higher than it would be if you pay the closing costs upfront), but Viotto notes that lenders are starting to ask for the appraisal costs up front, a fee that’s usually around $250.

”Like homeowners, lenders are now looking to protect themselves,” says Viotto, explaining that they want to see that the borrower is committed to doing this loan. Commitment, in fact, is why it’s so important to be prepared. Understanding what you’re getting into is the difference between emerging from the refinancing process a happy, healthy and wealthier person -- or as a still-broke, nervous mess.

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