Refinancing your home mortgage should not be difficult in today’s market as long as you have sufficient equity in your home and your credit qualifications are strong. I say this because the recent crisis in the real estate market has had two profound effects on consumers seeking credit of any kind with regard to real estate, whether purchasing or refinancing:
1) Equities have been drastically reduced because of declining real estate values. You may have had enough equity in your home to comfortably qualify for a refinance three and a half years ago. Today you may not. A lender considering an application for a refinance of a mortgage will want to see a 20% equity, that is the difference between the value of the home and the balance of the new mortgage needs to be at least 20% of the value of the home.
2) Credit markets have tightened up considerably. It was much easier for a consumer’s credit to qualify for a refinance of a mortgage three and a half years ago than it is today. Because of declining values in real estate and the sub-prime lending scandal of 2007 – 2008, lenders are now much more reluctant to loan against real estate and consumers must meet much higher credit qualification standards.
If you feel these two issues will not affect your ability to refinance your mortgage, consider the following:
1) Shop, shop, shop. Shop rates, shop lenders, shop fees. Call and compare rates and fees with several lenders and consider which seem most willing to receive your application. It is usually better to deal with a direct lender when the person you are talking to is the decision-maker, or has direct access to the individual who will be approving your application. So, for that reason, when you are talking to a lender, ask whether you will be able to have access and direct communication with that person (the decision-maker), should you make your loan application with them. Ask each lender for a “Good Faith Estimate” required by the Real Estate Settlement Procedures Act (RESPA) and ask them to email, fax or send it to you. Then you can compare them for rates, terms and fees to see which lenders are offering the best deal.
2) If your reason for refinancing is to take advantage of lower interest rates, a general rule of thumb is to try to achieve at least a two-percent reduction in your rate to counter the effects of the costs of refinancing (points/loan fees, recording fees, appraisal costs, title insurance, etc.). Less than a two-percent reduction will tend not to offset the costs of getting a new loan to pay off the old one.
3) You should plan on staying in your home for at least five years after you refinance your mortgage or you will likely lose money on the deal. With a two-percent reduction to your rate it will take approximately five years for the interest savings to offset the costs of refinancing. Five years is roughly the break-even point. After that you will be saving money every month.
Considering these issues, once you have found the lender you want to work with, it is just a matter of making your loan application. A good lender will walk you through the “how-to” from there.