Should you refinance your home mortgage?

Learn about the mortgage refinance process, if you qualify to refinance your home loan, and whether or not refinancing might benefit you.

The recession may be over, but most Americans wouldn’t know it. Unemployment and foreclosures remain high while the general outlook on the economy is low. Many are looking to refinance their home loan as a way to free up some dollars and possibly stay in their homes. While refinancing your home mortgage is always better than foreclosure, you should take the time to determine if refinancing is right for you.

The mortgage refinance process

When you refinance your home mortgage, you are simply restructuring your debt—not eliminating it. Your new refinanced loan pays off your original home loan. You now begin to make payments towards your refinanced mortgage, which typically has some type of advantage over your previous loan—whether it be a lower interest rate, longer repayment period, or a switch from an adjustable rate mortgage to a fixed rate mortgage.

While these are all great reasons to move forward with a mortgage refinance, there are costs to consider. Expect to pay around 2 percent to 3 percent of the total loan amount in refinance-related costs, including appraisal and closing costs. You may be able to negotiate away some of these costs if you stick with your current lender, but it’s worth shopping around to determine where you can get the best deal. (If you do fill out multiple applications for refinancing, be sure to do so within a 30-day period; your credit score won’t be dinged if you submit your applications during this time period.) Costs can be paid upfront if you have the cash, through a higher interest rate on your loan, or by rolling the fees into the principal of your mortgage.

Who qualifies to refinance their home mortgage?

In general, banks and other financial institutions have become more stringent in their requirements for securing or refinancing a home loan. Today, lenders require a good credit score (740 is now considered a good credit score) and 20 percent equity in your home to refinance. They also require borrowers to be able to document their income.

This means that if you’re unemployed or owe more on your home than it is currently worth (called an upside-down mortgage), you may have trouble refinancing your mortgage. And while you might be able to refinance with a mediocre credit score, you may end up paying more in interest.

Everyone’s situation is unique; while some are more favorable in the bank’s eye than others, it is worth at least checking if you are concerned about continuing to make your mortgage payments. If you don’t qualify to refinance your home loan and are facing foreclosure, the government has programs in place to assist you, such as the Making Home Affordable initiative and the Home Affordable Foreclosure Alternative (HAFA) program.

When it makes sense to refinance your home mortgage

There are several questions to consider when considering a mortgage refinance. Here are a few:

• Will refinancing your mortgage save you money in the long run? To find out if you will save money, divide your mortgage refinance fees by the monthly savings. The answer tells you how many months it will take for you to break even. If you plan to stay in your home beyond the break-even point, then refinancing your mortgage might make sense for you.
• Does your current loan have a prepayment penalty? If it does, add that penalty amount to your closing costs to determine your new break-even point.
• Are you concerned about your employment status? If you’re worried that you may lose your job in the near future, it might make sense to refinance your home loan now to a lower payment while you can still secure a new loan.
• Is your home’s current value worth more than your current loan amount? You can see what comparable homes in your area sold for by checking with your county’s assessor’s office or do a quick search on the web on sites as Zillow or Yahoo!’s Real Estate site. For a more accurate estimate, you’ll need to hire an appraiser, but doing some background research on your own should provide you with a good estimate.
• Do You Qualify for an FHA Loan or Refiance?The FHA is a part of HUD (U.S. Dep of Housing and Urban Development) and because FHA loans are insured by the government, they make it easier for a lender to offer you a better deal.

The general rule of thumb is that it’s a good idea to refinance if the new rate is one percentage point lower than your existing loan rate. Review current mortgage interest rates and talk with your financial advisor, banker or mortgage broker to determine if a mortgage refinance is right for you.

This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.

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