5 Tips for Refinancing a Mortgage Today

BOSTON (MainStreet) -- Fears of a "double-dip" recession and the possibility of a widening European debt crisis have lowered U.S. mortgage rates to levels not seen in more than half a century.

Thirty-year fixed-rate mortgages fell to 4.15% on average during the week ending Aug. 18 -- the lowest level in more than five decades, according to home-loan giant Freddie Mac.
Using industry websites and downloadable calculators is one way to make refinancing a mortgage easier.

Although rates have rebounded a bit since then to average around 4.22%, experts say it's still a great time for qualified homeowners to refinance.

"Record-low rates mean lots and lots of people could realize substantial savings by refinancing," says Erin Lantz, director of real estate site Zillow.com's Mortgage Marketplace. "That's not the case for every single homeowner, but I'd still encourage consumers to take the time now and look into refinancing."

True, banks have tightened lending standards since the U.S. housing boom's easy-credit days, when it seemed like anyone could get approved for anything.

But Lantz says a little bit of calling around should turn up a lender who'll OK your application, especially if you have at least 20% equity in your home and a 740 credit score or better.

"There's a good chance that there's a way out there for many homeowners to qualify for today's record-low rates," she says.

Here are five things Lantz says homeowners looking to refinance at today's low rates should always do:

Tip No. 1: Shop around.
Mortgage rates vary widely these days, so experts recommend doing lots of research before settling on a deal.

"We're seeing an increase in pricing disparity between lenders, which means it's more important than ever to shop around for your loan," says Mona Marimow of mortgage website LendingTree.com. "Rates can vary by 1% or more from lender to lender, translating into a difference of about $140 per month on a $250,000 loan."

Lantz adds that consumers should look at more than just rates.

"Fees and the quality of service that you'll receive from different lenders vary, too," she says. "So, you should always do your research -- reading reviews and comparing rates and fees in advance so you're ready to lock in when rates hit the level you're looking for."

Popular Web sites for mortgage information include Zillow, LendingTree and Bankrate.com. You should also check with banks in your area, as well as ask friends and relatives where they got their mortgages and whether they'd recommend using their lender.

Tip No. 2: Figure your break-even point.
Today's low rates are great, but they're not for everyone.

People who already have mortgages with fairly low rates might consider skipping a refinance, as a new loan typically carries thousands of dollars in closing costs.

"It's not as simple as saying: 'I've got a 5% mortgage and rates have dropped to 4%, so that's a better deal,'" Lantz says. "You have to think about things like what your closing costs will be and how much longer you plan to stay in the home."

A good rule of thumb: Only refinance if you can cut your mortgage rate by 0.5 percentage points or more from what you're paying.

Lantz also suggests doing a careful analysis to calculate your "break-even" point -- how many months it will take to recoup your closing costs.

You can do this with a pencil and paper, but mortgage-oriented websites often have online calculators to make the job easier.

Zillow's online refinance calculator is here, or you can download it onto your smart phone.

Tip No. 3: 'No-closing-cost' deals really have closing costs.
All mortgage refinancings -- even those billed as having no or low closing costs -- charge you in some fashion for loan expenses.

"When it comes to refinancing a mortgage, there really is no such thing as a free lunch," Lantz says. "Even if you see an ad that says: 'No closing costs,' there are still costs that you pay in one form or another. So you should ask your lender to show you all of options available to you."

Closing costs typically total about 1% of your new mortgage's principal, covering such things as home appraisals and lawyer's fees.

But there are several ways lenders work these fees into refinancing deals, including:
  • Upfront charges. The traditional way of paying for closing costs, this method involves simply bringing a certified check to your mortgage closing to cover expenses. The lender will usually tell you a day or so ahead of time how much money you'll need.
  • "Rolled-in" closing costs. With this option, the bank adds all closing costs to your new loan's balance rather than making you pay upfront. You won't spend any money out of pocket, but you'll pay slightly higher mortgage bills each month throughout your loan's lifetime.
  • No- or low-cost refinancings. These deals don't charge you any closing fees at all, but carry a little higher interest rates instead. That compensates the lender or mortgage broker for "eating" your new loan's closing costs.

Which option to choose depends on your individual circumstances.

"As long as you understand that there are always closing costs involved in a refinancing, you can simply ask your lender to lay out all of the different scenarios and pick the one you like the best," Lantz says. "It's really a question of which method works best for you."

Tip No. 4: Consider a "cash-in" refinancing.
Remember "cash-out" refinancings?

Those were the deals in which homeowners refinanced existing mortgages during the housing boom for larger loans and walked away with thousands in cash, pulling out some of the equity they'd built up because property values were soaring.

Well, today's housing bust has boosted interest in the opposite kind of deal -- the "cash-in" refinancing.

That's where homeowners swap existing loans for smaller mortgages instead of bigger ones, bringing cash to the closing table to make up the difference. (Hence the term "cash-in.")

Lantz says cash-in deals allow consumers whose property values have plummeted during the housing bust to increase their home equity to 20%, the minimum many refinancing deals require these days.

"If you can bring a little cash to the table and push your equity up, people who otherwise couldn't qualify can take advantage of today's low rates," Lantz says.

Tip No. 5: Get a rate-lock confirmation.
Today's historically low mortgage rates have left many lenders swamped with refinance applications, so it's important to have your bank "lock" your rate in writing.

Most lenders will send you a "rate-lock sheet" by fax or email upon request, confirming the mortgage rate you're getting and spelling out when the rate lock expires.

"The idea is to hold your lender accountable for the rate commitment they're making," says Lantz of Zillow.com. "You also want to show the lender that you're an educated and informed consumer."

Lantz recommends asking for at least a 60-day rate lock in today's busy refinance market -- and quizzing banks to make sure they can really close your deal before the lock period expires.

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