Whenever rates are low, refinancing
tempts homeowners. Refinancing can make sense to lots of people who bought houses
when rates were higher or who want to consolidate their bills.
Not everyone would benefit from refinancing, though. Some homeowners with second
mortgages, a lot of debt or trouble paying bills on time might find that they
would pay more by refinancing than by sticking with the loan they already have.
"The first thing that
comes to mind is, 'Is there enough equity in the property?'" says Paul Tobin,
market manager for the mortgage arm of Fleet Financial Group Inc. A homeowner
who borrowed 90 percent of the house's value three years ago hasn't increased
the equity stake very much since then. It doesn't make sense to refinance such
a loan, especially if closing costs are rolled in.
second thing," Tobin says, "would be the borrower's own personal qualifications,
and that goes back to standard credit underwriting." If borrowers expect
to save money, he adds, "They need to maintain a positive credit history
and maintain a relationship between their debt level and their income level."
The relation between income and debt is strained for
many people. Lots of homeowners have taken out second liens in the form of home
equity loans and lines of credit. Others have taken advantage of recent looseness
in credit to borrow more than their houses are worth. These folks will have trouble
finding a lender that will refinance their mortgage at reasonable rates.
Refinancing customers receive the same scrutiny they got when they took out their
original mortgages. They're evaluated as to whether they meet credit and debt-to-income
standards. That spells trouble to a once-stellar customer who has made a few late
payments or whose credit card balances have skyrocketed, or whose income has fallen.
the devil is
Experts point out that none of this will exclude
someone from refinancing entirely. Almost any borrower can find a willing lender.
The devil is in the details: Borrowers with smudged credit or other problems --
"nonconforming" is the term used in the trade -- may find the rates
they qualify for today are either higher than the rates they already have, or
not low enough to make refinancing worthwhile.
with good credit records have to watch out for a couple of things that could turn
refinancing into a bad deal. They should beware private mortgage insurance and
stretching out a loan for way too long.
Most people who borrow
more than 80 percent of a home's value pay private mortgage insurance, which protects
the lender in case of default. Let's say the owner of a $150,000 home who wants
to combine a $110,000 first mortgage with a $20,000 home equity loan. The combined,
refinanced loan would be for more than 80 percent of the home's value, so the
borrower would have to pay PMI. Such a borrower would have to consider the PMI
payment when deciding whether refinancing would save money.
Refinancing might be a bad deal for a homeowner who has been paying the same mortgage
for many years. If you have been paying for 20 years on a 30-year mortgage, refinancing
for another 30 years might result in a lower monthly payment. But you would be
making those payments for 30 more years instead of 10.
The bottom line is that you have to look at the bottom line: figure out the costs
of refinancing and compare those with your existing payment and calculate how
long it would take to recoup the costs. If you don't plan to stay in the house
to make it worthwhile, stick with your existing mortgage.