Refinance your mortgage
Paying more than 5 percent? It's time to look for a new loan.
The stalled economic recovery has pushed interest rates to near-historic lows (pending any uptick with the recent downgrade in the US credit rating). If you’re paying more than 5 percent on a 30-year loan, or 4.5 percent on a 15-year loan, it could be worth investing the time and money to find a better deal: to be precise, refinancing a $250,000 mortgage from 5.5 to 4.75 percent saves about $40,000 over 30 years. Lenders are asking a lot from borrowers now – only consumers with credit scores over 740 and at least 20 percent ownership are getting the best rates – but the deals are there if you know what to do.
CHECK YOUR CREDIT. Your score will determine your eligibility for a new loan; check it for about $20 at myfico.com (the site also has tips for improving your score). Every 20-point decline below 740 will mean additional fees, but with rates as low as they are, it’s worth shopping even if your credit isn’t tiptop. If your home loan is underwater but you’re current on your payments, you may still qualify via the government’s Home Affordable Refinance Program (HARP), which was extended through June 2012.
KNOW THE WORTH OF YOUR HOME. Any lender you choose will do its own home appraisal, but you’ll want to get an estimate before starting the process to be confident you have enough equity to make the cost of refinancing worth the savings. The better terms will generally go to homeowners refinancing 80 percent or less of their home’s appraised value. Compare estimates from online real estate information sites such as http://www.Zillow.com or http://www.Cyberhomes.com, as well as lender sites, including
SHOP AROUND. Because you’re already a client, your current lender is not motivated to give you the best deal – though it may be willing to streamline the process, says Jack Guttentag, a professor of finance emeritus at the University of Pennsylvania’s Wharton School who runs The Mortgage Professor website (http://www.mtgprofessor.com). He advises getting quotes from other lenders first – try a credit union or community bank, as well as large lenders – and then seeing whether your current lender will offer something better. If you’d like to use a mortgage broker, who can make inquiries for you, choose one who quizzes you on your finances before recommending products.
BE FEE-SAVVY. A refinancing can involve complex decisions about the best way to handle closing costs, which in Massachusetts run about 1.5 percent of the total loan amount on average, or $4,050 on a $270,000 loan. The Tri-Refi Refinance Calculator at HSH Associates, a publisher of mortgage and consumer loan information (http://www.hsh.com/refinance-calculator), lets you compare options easily.
GO LONG. Neil Collins, a certified financial planner in Melrose, cautions against the temptation in these debt-averse times to refinance into shorter-term mortgages that have lower interest rates than 30-year agreements unless your financial situation is rock solid. Instead, get a fixed-rate 30-year loan and make bigger payments designated for principal whenever you have the spare cash.