Interest Rates Are Low – Should You Refinance?

Whether ’tis nobler in the hearts and minds of men to suffer the slings and arrows of the refi?

Great question. Interest rates are at a four-decade low and have been for months. Should you refinance? And maybe more importantly, can you refinance? Although it’s not as easy to get a loan as it had been, the banks are lending. Lending requirements are more stringent than before and lenders are making it difficult to get approved.

Eighteen months of financial history, including tax returns and pay stubs used to be sufficient. Now everyone is requiring 2 years worth of documentation and proof. Keep in mind that the best rates are only going to those with the high credit scores and clean credit history. There are those who just won’t be able to take advantage of low rates because they’ve suffered a job loss or their income has been reduced and it now falls below the minimum required to qualify.

However even those up-side down or under water can get refinancing. It isn’t impossible to do but it certainly isn’t easy either. If your loan is owned by Freddie Mac or Fannie Mae, as most are, you may be able to refinance through the Home Affordable Mortgage Program, or HAMP. This program was specifically designed to enable those homeowners with no equity to refinance their mortgages to a more affordable interest rate.

What if you recently refinanced? Recent interest rate drops have enticed homeowners who already refinanced to think about refinancing again. However one thing you should look at if this is the case for you is how long will it take for the amount you save on your monthly payment is equal to the amount of insurance, appraisal and escrow fees. An average loan will cost about $3000 to refinance. Compare your old mortgage payment to the new proposed mortgage payment. How many months of savings will it take to “get back” the closing costs?

New lower monthly mortgage payments do not necessarily translate into lower overall costs. You are restarting the payment clock when you refinance. Let’s say you have been paying your mortgage for 15 years, there are 15 years left to pay it off. You refinance and now you have a new 30 schedule. All that money you’re paying for the years when your house otherwise would have been paid off could outweigh the amount you save with a lower interest rate. Ask your loan officer about a 15 or 20 year loan. Often the interest rates are even lower on these shorter term loans.

Like every other purchase you make do your homework. Ask around. Ask family, friends and co-workers who they refinanced through and what interest rates they got. Before the housing meltdown, people were in a buying frenzy. They borrowed without really doing their homework. You must understand the terms of the loan now and in the future. You have to pay back the loan according to these terms or you could lose your home as so many people are doing right now. Read all the documents that come with your new loan. If you don’t understand something then ask questions.

If you educate yourself, do the research to know what you’re getting into and think about the decision sensibly, you could save a lot of your hard-earned money in the long run.

For first time buyers or move-up buyers looking at San Diego new homes, this is a great time with interest rates at historic lows. But is it time for home loan refinancing? It depends.