Feature

Mortgage refinancing: A chance for a do-over

Interest rates on 30-year fixed-rate mortgages are as low as they've been in decades, but there are a few caveats.

Interest rates on 30-year fixed-rate mortgages have dipped to around 5 percent, and homeowners are “rushing” to refinance, said Amy Hoak in Marketwatch.com. While rates are as low as they’ve been in decades, borrowers may run into a few roadblocks. For one, “lending standards are probably a lot stricter than they were the last time you applied for a mortgage.” Lenders closely scrutinize credit scores and require documentation of income and assets. The best rates usually don’t apply to jumbo loans—those above $417,000 in most markets. “Expect a thorough and frank discussion of your finances with a mortgage banker or broker before the application is even filled out.”

Fluctuating home values could cause problems for some borrowers hoping to refinance, said Les Christie in CNNmoney.com. Refinancing will require a new appraisal of your home, and if your equity falls below 20 percent of the appraised value, you may need to buy private mortgage insurance. “The insurance adds a point or two to the monthly mortgage costs, which turns a 5 percent loan into a 6 percent or 7 percent loan, erasing any advantage of refinancing.” Given the potential for savings, though, a new loan is still worth exploring—especially if you can cut your rate by at least a percentage point or switch out of an adjustable-rate loan.

If you’ve had the same mortgage for a while, refinancing may not even be possible, said Bob Tedeschi in The New York Times. “Because the typical mortgage only lasts for about five or six years before the home­owner sells the home or refinances the loan, lenders collect much of the mortgage interest during those years.” After that, most of the payment goes to principal rather than interest—so there’s little incentive for the lender to refinance. What just might make sense, depending on your current rate and how long you plan to stay in the home, is a brand-new mortgage. If you’re averse to “starting the 30-year clock anew,” consider paying a little more every month to trim years off the loan.

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