Should You Refinance Your Mortgage or Stand Pat in Today’s Market?
Wednesday, May 20th, 2009
With interest rates on 15- and 30-year mortgages, either near or at historic low levels, now might be the ideal time to explore refinancing your home’s mortgage. However, regardless of the interest-rate, the current mortgage crisis has taught homeowners that understanding their home loan and the process of obtaining a mortgage is vital for ensuring sustainable homeownership.
However, refinancing comes at a cost. For instance, closing fees on a new mortgage can average 3% of the total loan or $3,000 on a $100,000 loan. Closing costs include title policy, appraisal fees, and reestablishment of escrow accounts. So before you refinance, I suggest looking at some characteristics of homeowners to help you determine whether getting a new loan makes good economic sense, or are you better off with your current loan.
I suggest refinancing if you align with the following characteristics:
• Your mortgage’s interest rate is significantly higher than the market’s interest rates.
• You are planning to continue living in your current home for at least several years which will help recoup closing costs over the life of the loan.
• You have an adjustable rate mortgage that is due to reset, reaching a rate significantly higher than the market-rate.
• You have an adjustable rate due to reset and would like to lock-in, a secure and competitive fixed-rate.
• You have a decent amount of equity in your home, about 20% or more. You may be able to refinance even if your home is now worth about the same as your loan value or even a little less; check www.makinghomeaffordable.gov for details refinancing loans that are 105% or less of their property values.
• You have money to use for closing costs. Typically you can obtain a more favorable rate if you have money available up-front as opposed to bundling it into the new mortgage.
On the other side of the coin, it may not pay to refinance if you fall into one or more of the following groups:
• You already have a pretty low interest, 5% or lower, and recovering closing costs is nearly impossible.
• You are planning on moving which makes recovering closing costs nearly impossible too.
• 
You have an adjustable rate mortgage at a pretty good rate and you are planning to move in the next year or two.
• The reassessment of you property is part of the refinancing process and it may force you to pay private mortgage insurance (PMI). You will be charged PMI* when your loan is more than 80% of the current value of the home (*Fannie Mae and Freddie Mac sold loans are eligible under the new Refi Plus program)
• Keep in mind that you are reducing the principal balance on your mortgage, from the very first mortgage payment. Therefore when it’s affordable, consider refinancing for a shorter term. This will prevent you from extending the term of the loan.
• You don’t have the money for closing cost and the interest rate you have to settle for is too high.
And finally, too many homeowners have been struggling to pay not only the mortgage but also other bills, due to a loss of income or perhaps an unexpected expense. As a result, their credit quality has taken a good hit since they obtained their mortgage.
However, for these homeowners who are saddled with a high interest rate, may still qualify for a loan modification or refinance at ShoreBank or other community banks who engage in character lending and rely on the borrower’s payment history, instead of the credit score, in qualifying for refinance loans. It’s worth the effort to obtain lower payments and build equity.
The Making Home Affordable modification program will provide payment relief and prevent foreclosures and is available through your current lender.
