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As Mortgage Loan Costs Fall, Refinancing Perks Up

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It's important to do your homework before and during the process to make sure refinancing is right for you.

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Angie Hicks

Published: February 16, 2009

With interest rates at their lowest in years, Ken and Christine Kline saw an opportunity to refinance their Palm Harbor home.

"The rates were a little bit hard to pass up," Ken Kline said. "I think we were sitting at about 6.4 percent with the first mortgage and we got to 4.75, so the difference was enough to make it worthwhile for us."

The couple went through a trusted mortgage consultant they have used before and called the refinancing process painless.

"She handled pretty much everything for us," Kline said. "We had to provide some documents: a survey, our title. She pretty much took the credit application info over the phone and that was about it."

The Klines, who combined their original mortgage and home equity loan into one 30-year fixed-rate loan, had to pay for a home appraisal and closing costs, but rolled that into the new loan, so they paid nothing out of pocket.

While the process was a smooth one for this family, other homeowners are finding they're not able to take advantage of the low rates. Those best positioned to refinance have a good credit score, equity in their home, and have been on time with mortgage payments for at least the past year, according to highly rated mortgage specialists on Angie's List.

Homeowners with an adjustable-rate mortgage, or those who can lower their fixed rate by at least one percentage point and who plan to stay in their home for a few years should consider taking advantage of the low rates.

Johnny Cardosi, a senior loan officer for Belleair Bluffs-based HomeBanc, estimates his branch has seen a 75 percent increase in refinance applications in just the past couple of months, but many of them are not approved.

"Probably fewer than 10 percent are able to refinance because their values have dropped and they owe more than the mortgage is worth," Cardosi says. Or they owe too much to get a rate than doesn't require private mortgage insurance.

"You probably need to at least have 25 percent equity in your home and a credit score preferably in the 700s," Cardosi says.

Rates are creeping back up, he says, so homeowners interested in refinancing should begin the qualifying process soon.

"You need to lock in the rate when it's low or you'll miss it," Cardosi says. "The best thing is to have all those ducks in a row and when interest rates get to that point, then drop the hammer."

Refinancing a loan isn't free, so it's important to stay in the home long enough to reap the benefits of a lower rate and mortgage payment. For those who don't have equity in their home, owe more than it's worth, have less-than-stellar credit or have been behind on their mortgage payments, there still might be opportunities to refinance, but they'll need to work with a reputable mortgage broker to determine their options.

The Klines, who plan to stay in their home for at least five more years, did their homework before and during the process to make sure refinancing was right for them. Ken Kline estimates the couple will save tens of thousands of dollars over the life of the loan and several hundred dollars a month.

"If you do it, I would do it soon, because the rates are heading back up," Kline advises. "Take the time to understand the amortization tables to see how much you're really paying over the life of the loan and how much you'll really save."

BEFORE YOU REFINANCE

Angie's List mortgage specialists offer these tips for homeowners:

1. Check your credit. Lending guidelines have tightened, which makes borrowing more difficult for people with low credit scores. Before you refinance, pull your credit report and double check that the information is accurate and up-to-date. If there are any discrepancies, work with the credit reporting agency to have those cleared up before you inquire about a loan. Credit scores are the overriding factor in determining the cost of credit.

2. Determine your home's value. You now need more equity in your home in order to refinance. Expect the lender to request an appraisal.

3. Don't wait for a better deal. By holding out in hopes rates will drop even more, you risk your home depreciating more or your financial situation worsening. Lenders soon expect a backlog of applications, so you also run the risk that the rate you locked in will expire because your lender can't close the loan on time. Look for a lender who is willing to lock in a rate for at least 60 days.

4. Get quotes in writing. E-mail is fine, but be sure your mortgage consultant gives you rate information in writing so you're not surprised by a change at closing.

5. Research your lender. Use an independent mortgage consultant, who can get multiple rate quotes with one credit pull. Check consumer ratings on compilations such as Angie's List and go to Florida's Office of Financial Regulation, www.flofr.com, and click "Search for licensed entity" to check credentials and any complaints against brokers.

6. Disclose all sources of income. If you rely on cash income from tips, etc., it's important you account for all of that to improve your chances of qualifying for a loan.

7. Ask for a closing cost guarantee. Beware of any lender who will not give you a written guarantee on the estimated closing costs. Your costs could end up coming in a lot higher than initially disclosed. If costs do change, ask your mortgage professional for an explanation before you agree to anything. Include closing costs in your loan to avoid paying out of pocket, but if you can pay them up front, you'll save on interest.

8. Eliminate PMI? Private mortgage insurance is required whenever a conventional loan exceeds 80 percent of the value of the home. You can eliminate PMI if your home has at least 20 percent equity, based on a current appraisal. You can avoid paying PMI on a new loan by making up the difference at closing or by taking out a second mortgage for the difference.

9. Know your rights. Customers are entitled to a three-day grace period during which they can pull out of a deal. The lender must be notified in writing of the rescission within three days of the date of closing and has 20 days to return the customer's fees.

10. Read the fine print. Before you sign anything, be sure you have read the terms of the loan and ask any questions you may have.

Angie Hicks is the founder of Angie's List, www.angieslist.com.

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