By Geoff Williams, FrontDoor.com | Published: 2/02/2009
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."
Interest rates have crept up, but refinancing may make sense for you.
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