Refinancing your mortgage in uncertain financial times
Monday, January 23, 2012
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.
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.
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.