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Secrets to Successful Refinance

Refinance process is more than a rate chase

Oct. 23, 2010


There is a lot more to consider in a potential mortgage refinance than just the interest rate.

Mortgage rates dropped to 4.19 percent this month, their lowest since 1951, according to a survey by Freddie Mac. And the steadily dropping interest rates have homeowners buzzing about refinance options.

"We are having record months [for loan closings] this year," says Rob Runnells, production manager for Old Point Mortgage in Hampton. "These last two months have been the best we've seen all year."

The steadily falling rates certainly had Gloucester, Va., resident Debbie Post running to her nearest mortgage company. She expects to close on a refinance loan in November that will drop her interest rate from 7.85 percent to 3.87 percent. That drop will save her about $250 a month on her mortgage payment.

"We've been in our house for a little more than 10 years," she says. "I've thought about refinancing before when the rates got low, but I figured right now was as low as it was going to get."

But lenders and housing counselors warn that refinancing is not just about chasing the lowest rates. There's a lot of homework involved and a few other numbers to consider.

Consider Your Situation
The old refinance rule advises homeowners to skip the process until the rate drops one to two percentage points. Right now, that's a likely scenario for many, but not all should rush to refinance.

"You have to make sure you're going to recoup the closing costs and other fees within the amount of time you plan to stay in the house," says Andrew Grasso, a financial specialist and HUD-approved housing counselor for Clearpoint Credit Counseling Solutions. Clearpoint is a nonprofit credit counseling organization that has several offices in southeastern Virginia, including Hampton.

The best way to make the determination, he says, is to gather your financial stats before you approach a lender or mortgage broker.

Credit score, debt-to-income ratio -- how much of your monthly income goes towards payments -- and the value of your home are the make-or-break aspects of the loan approval process.

Since new federal regulations on the loan industry have taken effect, the process has become more formulaic and less subject to a lender's individual discretion, says John Laudenslager, a loan processor for Affordable Mortgage of Virginia, which has an office in Newport News. That can mean that some homeowners who would have previously qualified could be denied a new loan.

An excellent credit score is the first step in the right direction. Laudenslager says most FHA loans require a score of 620 or higher and many conventional loans look for scores around 660 or higher. You can check your report for errors or unknown mishaps for free at up to three times a year.

Paying for a copy of your actual score is a good idea in this case, says Grasso.

"You want to be able to talk shop with the lenders when you call them," he says.

The second piece of information -- your debt-to-income ratio -- should be calculated in two ways. The front-end ratio divides your current mortgage payment by your monthly gross income. Most lenders want to see a percentage that ranges between 33 and 43 percent. The back-end ratio divides all of your recurring debt (mortgage, car payment, school loans, etc.) by your gross income. A percentage in the low to high 40s is an acceptable range.

But lenders agree, the trickiest part these days is figuring out a home's value. Since an appraisal costs about $400, you want to get a good idea of your home's value ahead of time.

First, check your last city assessment. If you can't find your paperwork, the information is generally available on the city's Web site.

"The city assessments are a lot closer to the appraisal value now," says Runnells. "I wouldn't have said that five years ago, but in today's market, the assessments are holding true."

In Bethany Lockwood's case, though, her 4-year-old city assessment did not reflect the fact that her mortgage was now worth more than her Southampton County house -- a fact she found out after paying for a refinance appraisal.

To help prevent that situation, homeowners also should conduct a rudimentary comparative market analysis. Most sales data is available on the city's real estate assessor's Web site.

Explore Your Loan Options
Although loan qualifications have become more stringent, there are a variety of new programs designed to help the struggling homeowner.

The federal Making Home Affordable program works with homeowners in distress to simply modify their current loans, for example. Other individual lenders have instituted similar programs.

A straight refinance option simply allows you to reduce your interest rate. In this case, you'll want to pay attention to the points attached -- fees paid to the lender that are equal to one percent of the principal amount of the loan. Points are often linked to the interest rate; the more points you pay, the lower the interest rate.

A down payment is not usually required, but points and closing costs are typically rolled into the total amount of the loan.

In most cases, you'll want to recoup all of these loan costs within a year to make the refinance worthwhile.

You'll also want to pay attention to the addition of private mortgage insurance. If your new loan covers more than 80 percent of the home's appraised value, you may incur this -- sometimes substantial -- monthly fee.

You also can cash out your home's equity during a refinance, an option that isn't as common in today's market, Grasso says, but still available.

Shop Lenders
Negotiable fees play a large role in determining the total cost of a refinance.

Some borrowers may not even have to change lenders to get a better deal. Some FHA loans offer a quicker streamline process. And many conventional lenders are offering current customers special breaks.

"I've seen specials all over the place this year," says Grasso. "There's 'no closing cost' specials, breaks on other fees, there's a lot of competition right now."

Typical fees can include an application fee, an appraisal fee and an underwriting fee. Lenders are now required to provide an accurate Good Faith Estimate, but that typically occurs after the application has been submitted.

Brett Noll, a spokesperson for Langley Federal Credit Union, suggests that homeowners request an informal cost estimate before the application process begins.

Once you begin to submit applications, try to do so within a two to three-week period, says Tim Klein, a spokesperson for Equifax, a consumer credit reporting agency. Doing so will limit the impact on your score.

"Consumers should be aware that each of the inquiries will show up on their report -- which is required by law -- but they will be scored (impact on score) as one inquiry."

Tie Up Loose Ends
The best lenders and brokers will walk you through the process, but there are a few things you'll want to double check.

First, your homeowners insurance must be transferred from your original loan to the new loan.

Also, any money left in the escrow account of the original loan should be refunded. This is generally an automatic process, but you should make a call if you don't see the money a week or two after closing.

Grasso recommends that you bring your Good Faith Estimate to the closing table with you.

"Every borrower will receive a HUD-1 form at closing that will list all of the fees," he says. "Check your Good Faith Estimate against the HUD-1 to make sure they match."

Finally, he says, remember that you have three days to rescind the new loan contract.

"After you sign all of the documents, you still have three days to rescind the loan for any reason," he says. "Of course, the application and appraisal fees will still apply."

Average Rates

National 30-year fixed: 4.21

Northeast (including Virginia) 30-year fixed: 4.22

Source: Freddie Mac's Primary Mortgage Market Survey for the week of Oct. 21

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