Maybe you've heard the pitches about how rates are falling and you need to act NOW to take advantage of them. Or maybe you're dreading that pending jump in the rate on your adjustable-rate mortgage. Or maybe you feel you're sinking and aren't sure there's a way out. Whichever way, here's what you need to know about refinancing.
If you want to get a lower interest rate
Who wouldn't like to lower their payments? If you've watched mortgage rates inch downward, you might be tempted.
But the mortgage markets are undergoing substantial adjustments, and there are changes you should be aware of, mortgage brokers said:
● Good credit ratings are even more important. Interest rates can be graduated based on slight differences in credit scores.
● Take stock of how much equity you have in your house. Loan programs are getting more restrictive about loan limits. That means you will probably need to have equity equaling 10 percent or 20 percent of the value of your home in order to find a lender willing to give you a better rate.
● Keep a close eye on interest rates. Cuts in the federal funds rate affect short-term rates, not long-term rates such as those for most mortgages. Mortgage-backed bond rates are the best determinant of mortgage rates, brokers said.
While those rates are still generally low, they are volatile. On some days, rates have dipped into the 5 percent range, and on others they're in the 6 percent range. So mortgage brokers are advising clients to look at refinancing if their rates are 7 percent or higher. If you have a lower rate and still want to refinance, you'll have to track rates daily and hope you'll lock in just as rates bottom out.
● Think about how long you plan to stay in your home. Some adjustable-rate mortgages are still available, and they may be worth considering if you plan to stay in your house for a short time, said Mark Ross, president and CEO of Tucson lender Prime Capital Inc.
If you have an ARM
If you have an adjustable-rate mortgage that's about to jump to a higher rate, it's probably a good time to consider refinancing into a fixed-rate loan, said Stan Lund, president of the Arizona Association of Mortgage Brokers. You may find a set-rate loan that's lower than the rate you'll have after your current mortgage adjusts northward.
● Before shopping around, make sure you understand what type of ARM you have, including when the adjustment period is scheduled to begin and what bond index the rate is tied to, Lund said. Once you have a handle on your current loan, you'll be better able to compare it with a fixed-rate mortgage, he said.
● Beware the prepayment penalty. If your loan has one, it could make refinancing too expensive. Prepayment penalties are most often found on subprime loans made to buyers with less-than-perfect credit histories, Ross said. However, some lenders may be willing to waive prepayment penalties to let borrowers refinance, Ross said.
If you're upside down
This means you owe more on your house than it's worth — and it can happen to people who bought at the peak of the market with no down payment, or who had loans with low teaser rates that later leapt higher.
If you're in this predicament, your options are limited, and it's unlikely you'll find a lender willing to refinance your loan, mortgage brokers said. If you default, the bank will be left with an asset — your house — that's worth less than you owe them.
● Do all you can to just stay put and make your mortgage payments. Timely mortgage payments have a powerful impact on credit, said Paul Dunn, president of The Mortgage Planners in Tucson. If you keep paying on time, eventually you should gain equity and boost your credit rating, making it possible to refinance later, Dunn said.
● If you're afraid you may fall behind on your loan, immediately contact your lender and try to work something out. "A lot of lenders now, they don't want your house back," Lund said. "They have enough foreclosures."
● A last-ditch effort might be to file bankruptcy to wipe out debt and reduce your bills enough that you can afford your mortgage payments and prevent foreclosure. In some cases, bankruptcy can give homeowners some extra leverage in negotiating new loan terms, said Tucson bankruptcy attorney Al Blankenship Jr. However, bankruptcy filings cost at least $1,500 to $3,500, so it may not be an option for many delinquent borrowers.
● If all else fails, "some people simply walk away from the house and let it be foreclosed on," Blankenship said.