by LELA DAVIDSON
Last September, the Federal Reserve announced its
intention to keep interest rates at near historic lows at least
until mid-2013. That's good news for homeowners with decent credit
and equity in their homes, who could save hundreds of dollars every
month by refinancing. Because refinancing can save borrowers
thousands over the term of their mortgages, you may think locking
in a low rate now is a no-brainer, but it's not that simple.
Breaking even
The first thing to determine when considering a
refinance is your break-even. In other words, how long before the
monthly savings pay for the up-front costs? Applying a lower
interest rate to your outstanding loan balance will decrease your
monthly payments, but you incur fees to get it. If a lender charges
$2,400 to refinance you into a loan with payments $100 lower than
your current mortgage, it's going to take two years to break even.
Most lenders allow borrowers with average credit to roll fees into
the balance of the new loan. But even if you are not out-of-pocket
for the cash, you have added those fees to the balance you
owe.
Long-term debt
Unless you get a shorter-term loan, you extend the
term of your loan every time you refinance. If you made payments on
a 30-year mortgage for five years before refinancing into another
30-year note, it's like you got a 35-year mortgage in the first
place. To pay down the balance faster, consider a shorter term.
Compare the rates and payments for 15- and 20-year terms. Depending
on your outstanding balance and the interest rate, the differences
in monthly payments may not be that much. And don't get stuck on
traditional mortgage terms. Many of today's lenders can customize
the length of your loan based on your individual needs. Got 23
years left on the current note? Forget the 30-year mortgage and
refinance to a 23-year loan instead.
Getting the best rate
You never really know what rates are going to do,
but if you think they will continue to drop, you may want to wait a
while. While it's true you can refinance again in another year or
two, you'll incur the fees (or add to your balance) again. Another
reason not to rush to refi is that by waiting, you have the
opportunity to rebuild damaged credit. The Fed's announcement gives
borrowers some confidence that rates will probably not spike in the
next year. Using that time to increase your credit score could pay
off with a lower interest rate.
When you're in trouble
In addition to keeping rates low, the federal
government has created several options to help homeowners who owe
more than their homes are worth.
Those with an existing FHA loan who have not fallen
behind on payments qualify for an FHA Streamline Refinance.
Fannie Mae- or Freddie Mac-backed mortgages can be
refinanced for more than the home's current value under the Home
Affordable Refinance Program.
Those facing imminent foreclosure may qualify for
loan modification from their current lender. These can reduce
payments, decrease the interest rate, and extend the loan
periods.
Finally, underwater homeowners may be able to
negotiate a deal with their lenders to settle the balance of a
mortgage for less than they owe.
A good lender should be able to explain the many
conventional and alternative ways to alter the terms of a mortgage,
or get a new one. The Internet and mobile notaries make refinancing
a mortgage easier than ever.
Lela Davidson is the author of Blacklisted from the
PTA (Jupiter Press, imprint of Wyatt-MacKenzie), a collection of
irreverent essays about motherhood and the modern family.
Last September, the Federal Reserve announced its intention to
keep interest rates at near historic lows at least until mid-2013.
That's good news for homeowners with decent credit and equity in
their homes, who could save hundreds of dollars every month by
refinancing. Because refinancing can save borrowers thousands over
the term of their mortgages, you may think locking in a low rate
now is a no-brainer, but it's not that simple.
Breaking even
The first thing to determine when considering a refinance is
your break-even. In other words, how long before the monthly
savings pay for the up-front costs? Applying a lower interest rate
to your outstanding loan balance will decrease your monthly
payments, but you incur fees to get it. If a lender charges $2,400
to refinance you into a loan with payments $100 lower than your
current mortgage, it's going to take two years to break even. Most
lenders allow borrowers with average credit to roll fees into the
balance of the new loan. But even if you are not out-of-pocket for
the cash, you have added those fees to the balance you owe.
Long-term debt
Unless you get a shorter-term loan, you extend the term of your
loan every time you refinance. If you made payments on a 30-year
mortgage for five years before refinancing into another 30-year
note, it's like you got a 35-year mortgage in the first place. To
pay down the balance faster, consider a shorter term. Compare the
rates and payments for 15- and 20-year terms. Depending on your
outstanding balance and the interest rate, the differences in
monthly payments may not be that much. And don't get stuck on
traditional mortgage terms. Many of today's lenders can customize
the length of your loan based on your individual needs. Got 23
years left on the current note? Forget the 30-year mortgage and
refinance to a 23-year loan instead.
Getting the best rate
You never really know what rates are going to do, but if you
think they will continue to drop, you may want to wait a while.
While it's true you can refinance again in another year or two,
you'll incur the fees (or add to your balance) again. Another
reason not to rush to refi is that by waiting, you have the
opportunity to rebuild damaged credit. The Fed's announcement gives
borrowers some confidence that rates will probably not spike in the
next year. Using that time to increase your credit score could pay
off with a lower interest rate.
When you're in trouble
In addition to keeping rates low, the federal government has
created several options to help homeowners who owe more than their
homes are worth.
Those with an existing FHA loan who have not fallen behind on
payments qualify for an FHA Streamline Refinance.
Fannie Mae- or Freddie Mac-backed mortgages can be refinanced
for more than the home's current value under the Home Affordable
Refinance Program.
Those facing imminent foreclosure may qualify for loan
modification from their current lender. These can reduce payments,
decrease the interest rate, and extend the loan periods.
Finally, underwater homeowners may be able to negotiate a deal
with their lenders to settle the balance of a mortgage for less
than they owe.
A good lender should be able to explain the many conventional
and alternative ways to alter the terms of a mortgage, or get a new
one. The Internet and mobile notaries make refinancing a mortgage
easier than ever.
This article appeared in the
February 2012
edition of Chicago Parent.
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