Eyeing a Refi? The Time is NowMany homeowners may feel like burying their head in the sand, an understandable sentiment given the recent shakeup in many markets. But with most interest rates in 2009 hanging around the lowest levels in decades, those playing the "ignorance is bliss" game may be missing out on a rare chance to improve their finances. Interest rates have dipped to levels not seen in decades, particularly on fixed-rate loans for prime borrowers. As the new year and a new administration get into full swing, average interest rates on 30-year fixed rate mortgages have hovered in the low 5% range (and in some cases, have dropped below 5%).While these rates have yet to translate into a quick turnaround home sales, they have spurned an increase in mortgage applications by homeowners looking to refinance at a lower rate. For homeowners sitting on a higher fixed rate or a less stable variable rate loan, the current interest rates may present an opportunity that just can't be ignored. If you've been considering a refinance but have been waiting to see exactly how far rates will drop, this just may be the time to make a move. While the last few weeks have seen an increase in refinancing applications, a sizable percentage of these applications will not be approved. Low interest rates aside, lenders are focused on protecting their investors and to that end have more stringent credit requirements than in years past. Homeowners who owe more than the current market value of their homes are unlikely to be approved for refinancing. By the same token, would-be borrowers with low credit scores or without well-documented income have a much greater chance of being denied. Some homeowners who hold jumbo mortgages (over the $625,00 limit for loans that can by guaranteed/bought by Fannie Mae or Freddie Mac in high cost areas) may find refinancing hard to come by. - Do You Qualify? - Do you have a solid credit score (660 and above)? Are you up to date on your current mortgage payments? If the answer to either is no, your chances of being approved are much worse. Also, if you are shopping for a cash-out refinance, you'll find that the credit and loan-to-value requirements are even more stringent.
- Establish Value - The next step is to begin determining your home's value. You can use various online resources to get a rough gauge of current market value. Some owners will pay for their own appraisal prior to applying for the mortgage. Other homeowners have been known to seek a ballpark estimate from their real estate agent.
- Compare Savings - Conventional wisdom was that a refinance loan should be 2 percentage points below your current mortgage to be worthwhile. That standard may not apply, however if you can lower your interest rate slightly but still recoup closing costs in a short time span. Likewise, switching from an adjustable rate to a fixed rate mortgage may be worthwhile regardless. Be wary of refinancing that extends the life of the loan, as this will most likely make the loan more expensive over the long term.
- Prepare for Screening - Lending standards have become much stricter over the last year. Be prepared to discuss all aspects of your credit, your current loan and your income history. Have at least a two-year documentation of your income, as "stated income" mortgages have all but gone by the wayside.
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