Time To Refinance?

What you can expect if you're looking for a better deal

look at applicants. “You’ll need at least 10% equity in your home now, to refinance,” says Keith Gumbinger, vice president of HSH Associates, a publisher of loan information based in Pompton Plains, New Jersey. That is, don’t expect to borrow more than 90% of your home’s appraised value.

For example, if a lender thinks your house is worth $200,000, you probably can borrow no more than $180,000. If you don’t have any home equity, you might be able to refinance, in this example, by putting in $20,000 of your own money, but who wants to put thousands of dollars into housing now, just to refinance a loan?

You also can forget about no-documentation loans, which were available a few years ago. “You’ll have to show proof of income, perhaps from a tax return,” says Gumbinger. “You also may have to present financial statements that show your overall debt load is manageable, compared with your income.” Typically, lenders want to see that all of your monthly payments (house, cars, and credit cards) don’t exceed 45% of your pretax income.

Rewards of refinancing. Assuming that you have it all — an excellent credit score, ample equity in your home, substantial income — does it make sense to refinance now? Yes, in some situations:

If you have an ARM, refinancing to a fixed-rate loan may be a good move. Many ARM rates will reset this year. For people who have ARMs, the good news is that short-term rates are low. ARM reset rates generally are pegged to short-term interest rates, such as the yields on one-year Treasuries. If your ARM has a benchmark that has come down with the Fed cuts, your reset will be much lower than it would have been a few months ago — perhaps even under 5%.

With fixed-rate, 30-year mortgages now averaging close to 6%, refinancing an existing ARM to a new fixed-rate loan might raise your monthly payments.

“However, refinancing to a fixed-rate mortgage may make sense if you’re nervous about future ARM resets and you’re not planning to move,” says Long. “A fixed mortgage payment takes some of the uncertainty out of your financial planning, and mortgage rates are low now, by historic standards.”

If you think you might move, refinancing an existing ARM that will reset every year to a new ARM may pay off. “You might be able to lock in a rate under 6% for the next five years,” says Gumbinger.

If you have a fixed-rate mortgage, you might be able to get a better rate now. In this situation, deciding whether to refinance is a numbers game. First, see how much you’ll save by refinancing. You can shop online for lenders charging below-average interest rates. Then, get a good-faith estimate of the total costs you’ll incur from the lender or mortgage broker, as required by law. Finally, see whether you expect to be in the house long enough for the future savings to offset the up-front expense.

For example, say it costs you $4,000 in fees to refinance a $200,000 loan. (Total refinancing

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