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When NOT to refinance

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.

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Equity and credit
"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.

"A 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.

Where 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.

Even borrowers 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.

-- Updated: Jan. 30, 2004




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