Refinancing Now While the Money is Cheap

Refinancing the mortgage isn't the trend it was just a few years ago in 2003, but with current 30-year loans priced under 6 percent, it could be again. And SHOULD be immediate action for some.

"Rates are within spitting distance of their 40-year lows," says Keith Gumbinger of HSH Associates, a mortgage research firm which publishes a Weekly Market Trends & Forecast Newsletter (for free subscriptions, Click Here). "For most borrowers, this is still a very good opportunity."

Good opportunity, absolutely. Walk in the park? Not so much, no. The current credit situation means that even though the money is still very cheap, it isn't flowing as freely as it did five years ago. It's harder to qualify for a good loan and it may take a bit more work to find the right one loan. But that's extra work that's especially worth doing for ambitious homeowners and homeowners currently holding challenging loans.

"First on line should be borrowers who had adjustable mortgages re-set last summer into the 7 percent range and higher," says Gumbinger.

The next group who should be in the marketplace today are those who bought homes with two-tier mortgages and/or have higher-rate piggyback loans. And, for those who have sub-prime mortgages at least two years old and have been making timely loan payments since then, the timing is right.

Here's how to determine if a refinance, (also called a “refi”) makes sense for you or someone you know, and how to find the best loan program and pricing.

1) Know your Credit Score. Check your credit score, and the equity in your home. If you don't have at least 10 percent of your home's value in equity, don't go any further. It will be near impossible to get a loan in this market.

If you're serious about refinancing, check your credit report at http://www.annualcreditreport.com/. If you have blemishes -- late payments and missed payments, and the like, pay to get a copy of your credit score at http://www.myfico.com/. If your credit score is below 680, you will have a very hard time finding a decent loan, says Gumbinger. Look into improving your score before you start applying for loans.

2) Know Your Savings. Be sure the savings are worth it. Use today's quick rule of thumb: If you're planning to stay in your home for at least five years, and can save at least one percentage point on your loan rate, a refi should be worthwhile. The longer you're planning to stay in your home, the smaller the rate differential needed to make it worthwhile. But, don't rely solely on rules of thumb: You will want to use a good online calculator to find out what your break-even point will be: HSH has one to use at www.hsh.com/usnrcalc.html.

3) Avoid Jumbo Mortgages. Large balance borrowers should think about getting in line. Mortgages of more than $417,000 are considered "jumbo" loans, and fall outside normal lending guidelines as they are too big to be guaranteed by pseudo-government financial giants Fannie Mae and Freddie Mac. Consequently, jumbo rates haven't fallen as fast as the rates on smaller mortgages. But the discrepancy between the cheapest and costliest jumbo loan is significant, so the right lender might make a refi worthwhile.

Furthermore, the Bush economic stimulus package might help: It would raise the threshold on the Fannie and Freddie backing; some loans now considered jumbo could be refinanced at lower conventional rates. Start working with your mortgage lender now, and keep tabs on the market through an automated rate watch.

4) Shop the Marketplace. It is a competitive marketplace for loans, so shopping for low-cost loans on-line makes a great deal of sense. Call your local mortgage broker. If you don’t currently have one, I might recommend a great site to get started with any obligation and cost: Click Here. Make sure that you get a reasonable good-faith estimate, up front, of how much the lender will charge you for such items as the appraisal, loan processing and the like.

5) Lock Your Rate. And don't procrastinate. It's not just the stock market that is volatile right now: Interest rates are rocky, too. Recession is the buzz word now. But, the moment the financial markets think the nation's biggest threat is inflation instead of recession, all long-term rates will rocket. And those cheap home loan rates will be just a fleeting memory.

Remember, when refinancing becomes the trend again, it may be too late. There are greater rewards for those who investigate their options and act quickly. You should start NOW.