Refinancing a Mortgage in Today’s Market

Written by: Alison Pruitt

With interest rates at historic lows, many homeowners are considering refinancing a mortgage. However, before you sign up for a “refi” be sure that it is the right choice for your situation and that you understand all of the implications.

How Refinancing a mortgage Works:  When you refinance, you essentially get a new mortgage with different terms than your previous mortgage.  Your new mortgage lender for will pay off your old mortgage and assume your mortgage debt.  When looking for a refi, be sure to compare several different lenders.  You will get the best rates and most favorable terms when lenders compete against each other.

The Advantages of Refinancing a mortgage:  The primary reason to refinance your mortgage is to save money.  You can do so in many ways, although the most common is to obtain a lower interest rate.  However, refinancing is also beneficial to homeowners who currently hold adjustable rate mortgages (ARMs) since they will lock in low interest rates and avoid the uncertainties of annual rate adjustments.

The Disadvantages of Refinancing a mortgage:  Refinancing isn’t free.  You must pay many of the same fees that you paid when you first purchased your home.  These costs usually include title insurance, appraisals, credit reporting, escrow, and lender’s fees.  Be sure you will save enough on your monthly payments to offset these fees; refinancing only makes sense if you’re going to stay in the house long enough to recoup the costs.  Some lenders offer zero-cost refinancing, but they usually roll the costs into the loan, giving you a higher interest rate.  Another disadvantage is that you will have the hassle of locating and providing pay stubs, tax records, and other documents.

Eligibility: When evaluating refinance customers, banks look at the same factors that they did when you first purchased your home.  If your employment status has changed for the worse,  your credit score has declined or you have a higher debt-to-income ratio than you did before, lenders may refuse to refinancing a mortgage or may charge a higher interest rate.  Another factor is equity.  Many people in the early 2000s purchased homes with little or no down payments and many banks were burned by customers who could not make their monthly payments.  Today many banks are reluctant to lend to homeowners who have little equity in their homes.

Underwater Home Owners:  The largest group of homeowners who cannot refinance are the ones who owe more on their mortgage than their home is worth.  However, there are several federal government programs designed to help these “underwater” mortgage holders – including one that can help homeowners who struggle to make monthly payments. Information about these programs is available at www.makinghomeaffordable.gov.  If you already hold a government-backed VA or FHA loan, you may be eligible for a special streamlined refinancing process that will not require the same documentation as a regular refi.  Underwater homeowners can also ask their current lenders to modify the terms of the existing mortgage to make it more affordable.


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Refinancing a Mortgage in Today’s Market

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