The time to refi is NOW

Pertinent and important information about why this is the time to make a move if you're thinking about refinancing. There are some caveats, so read this carefully. I'm as certain as I am about anything that six months from now this opportunity will have been lost, probably for our lifetime.

Many 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.

Why Now?

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 spurred 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.

What to Expect

While the last few weeks have seen an increase in refinancing applications, most 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 $625,000 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.

What to Do

* Find Out If 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 disappeared.

Mortgages: what's up, what's down

RISMEDIA, March 13, 2008-The Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey for the week ending March 7, 2008. The Market Composite Index, a measure of mortgage loan application volume, was 671.7, a decrease of 1.9% on a seasonally adjusted basis from 684.9 one week earlier. On an unadjusted basis, the Index decreased 1.4% compared with the previous week and was down 3.4% compared with the same week one year earlier.

The Refinance Index decreased 4.7% to 2448.2 from 2569.0 the previous week and the seasonally adjusted Purchase Index increased 1.6% to 368.8 from 363.1 one week earlier. The Conventional Purchase Index decreased 0.4% while the Government Purchase Index (largely FHA) increased 10.0%. On an unadjusted basis, the Purchase Index increased 2.3% to 410.8 from 401.6 the previous week. The seasonally adjusted Conventional Index decreased 3.3% to 898.0 from 929.0 the previous week, and the seasonally adjusted Government Index increased 6.0% to 294.5 from 277.8 the previous week.

The four week moving average for the seasonally adjusted Market Index is down 12.1% to 711.1 from 809.1. The four week moving average is down 2.4% to 361.9 from 370.7 for the Purchase Index, while this average is down 18.2% to 2752.5 from 3365.8 for the Refinance Index.

The refinance share of mortgage activity decreased to 50.6% of total applications from 52.4% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 15.5 from 17.3% of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.37% from 5.98%, with points decreasing to 1.05 from 1.15 (including the origination fee) for 80% loan-to-value (LTV) ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.72% from 5.26%, with points decreasing to 1.06 from 1.08 (including the origination fee) for 80% LTV loans.

The average contract interest rate for one-year ARMs increased to 6.72% from 5.83%, with points increasing to 1.27 from 0.85 (including the origination fee) for 80% LTV loans.

Is a refi right for you?

Radio airwaves, magazines and newspapers are filled with advertisements from lenders encouraging homeowners to refinance their home mortgages. These messages extol the virtues of switching from Adjustable Rate packages to fixed mortgages to lock in lower interest rates. The question is: would refinancing your mortgage really be the right move for you?

Rise of the Refi

Interest rates have fallen dramatically since the first of the year, and as a result mortgage refinancing has been gaining steam across the country. Applications to refinance existing mortgages have been on the rise in recent weeks. Many of these homeowners are just as attracted to the possibility of getting out of riskier Adjustable Rate Mortgages as they are to lower rates.

Whether or not you should refinance your mortgage depends largely on your personal circumstance. Most important are the interest rate and terms of your current mortgage as well as your outlook (how long you intend to own your home).

The conventional wisdom has always been that you shouldn't refinance until the interest rate has dropped a full point (or more) below what you're currently paying. The basic theory behind this advice is sound enough: given the typical costs associated with refinancing, chasing lower interest rates is only financially sound once the rates drop below a certain threshold. But the old rules fail to take into account some of today's situations, such as owners wanting to switch from an ARM to a fixed rate mortgage or those eyeing a "no-cost" refi.

Things to consider

As with most money matters, there is no "one-size-fits-all" answer to the refinancing question. If you're considering refinancing, consider these elements:

• Rate - Interest rates have been dropping throughout 2008, and a large number of homeowners are seeking to take advantage by locking into lower rates. Some believe that it is better to wait and see if rates will continue to drop, owing that the general trend has been downward. On the other hand, the current rates are a known commodity that you may wish to take advantage of.

• Risk - Historically the main motivation for refinancing a mortgage has been to secure a loan with a lower interest rate. But many homeowners are now seeking to refinance mainly for the kind of security that ARM products typically can't offer. If you have concerns over future fluctuations or spikes in interest rates, you may wish to lock in a fixed 15 or 30 year fixed rate mortgage, particularly if there is no annual or lifetime cap on the amount that your current loan can increase.

• Term - In addition to the rate and structure of your loan, take into account the term of your current loan and any potential refinance. For example, if you've already paid off eight or nine years of your current mortgage, you might find opportunity in a fixed 15-year or 20-year loan as opposed to the more common 30-year product. In general, extending the total term of your loan will negate the benefits of lower interest rates, so try to keep the bigger picture in mind.

• Closing Costs - As with primary mortgages, refinancing a mortgage entails up-front expenses. Many lenders are offering refinancing packages with modest out-of-pocket expenses. Even if lower than average, these costs may be substantial and additional fees may be added to your loan balance. Some lenders are even offering "no-cost" refinancing in order to attract homeowners. Remember that in such cases you'll likely not get the lowest interest rate available in the market. Be sure to carefully weigh the benefits of any "no-cost" package against those of traditional refinances available to you.

The Break-Even Point

Unless you've secured no-cost refinancing, you'll need to weigh the cost of the new loan against the amount you'll save over the term of the loan. One simple way to determine if refinancing is in your best interest is to determine the amount of time (with your monthly savings) it would take to recoup any fees or closing costs.

To start you'll need to determine your (potential) monthly savings. Review your payment coupon to verify the amount of your current monthly interest and principal. After establishing the rates and loan packages that you qualify for, ask your loan officer or mortgage broker for an estimated monthly payment. Many online mortgage calculators can also help you determine monthly costs if given the principal loan conditions.

You can now use that monthly savings to determine the point at which you'll begin to see a real return. For example, say refinancing will entail $2000 in costs but will save you $50 every month in payments. If you divide the mortgage fees by the monthly savings you find that the "break-even" point is 40 months from now. After that point the monthly savings would no longer be mitigated by the up-front costs.

Again, your personal situation determines whether or not the prospect of refinancing is truly viable. If you plan to own your home for many years or the cost of refinancing is very low, then you're more likely to realize the benefit of securing a new mortgage.

A caveat: be sure to check your calculations with a mortgage broker you trust. Online services may appear to be less expensive, but you have no idea with whom you're dealing.