Thinking refi? Look into it now, experts advise

CHICAGO — Lured by low mortgage rates, many homeowners have been rushing to refinance. Interest is gaining for good reason: Eligible borrowers can lock in rates that haven't been this attractive in decades.

"With interest rates hovering around 5 percent for conforming loan amounts, homeowners should begin to seriously consider refinancing into a new fixed-rate mortgage, especially if they currently have an adjustable-rate mortgage," said Lisa Weaver, president of Columbia, Mo.-based Certitude Financial Group.

And don't drag your feet, either, she said.

Rates on jumbo mortgages are still high, she said, but the national average rate on a 30-year fixed-rate conforming mortgage is the lowest in at least 37 years, according to Freddie Mac.

The conforming-loan limit in 2009 is $417,000 for most areas of the continental United States, although in designated high-cost markets it will be up to $625,500.

Given the volatility in the mortgage market this year, Greg Gwizdz, national retail-sales manager for Wells Fargo Home Mortgage, also advises homeowners to be proactive. It's possible rates will be low for a while, but in this turbulent economy, it's best not to gamble that tomorrow will bring a better deal.

"Don't sit back and say I'm going to wait for something to happen and for rates to go even lower," he said. If you're able to refinance into a mortgage that will be better for your finances, don't pass up the opportunity, Gwizdz said.

Below are other points to consider:

1 Have an idea

of home's value

Before starting the refinancing process, call a real-estate agent or look online at sites including Zillow.com to get an estimate of what your home could be worth, said Scott Everett, founder and president of Dallas-based Supreme Lending.

If you're "drastically upside down" on your mortgage, meaning that you owe a lot more than your home is now worth, the possibility of refinancing might end right there.

"If you owe $250,000 and the house is worth $250,000, it (refinancing) is worth discussing," Everett said. But if you owe $250,000 and "the house is worth $150,000 and you're in Southern California, then you probably won't be able to do it."

Many Southern California markets have experienced a drop in home prices.

To get a better idea on a home's value, borrowers might ask their mortgage firm if the appraiser it works with could give a ballpark estimate before starting the process, said David Adamo, CEO of Luxury Mortgage, in Stamford, Conn. That's still just an estimate until an appraiser comes to your home, he said.

2 Get ready for a thorough screening process

It's not impossible to get a mortgage in today's environment. But lending standards are likely a lot stricter than they were the last time you applied for a mortgage, so expect a thorough and frank discussion of your finances with a mortgage banker or broker before the application is even filled out.

Lenders are asking would-be borrowers to document income and assets thoroughly. In general, many also want FICO credit scores of 660 or 680 for conventional conforming mortgages. Requirements are lower for loans backed by the Federal Housing Administration, Gwizdz said.

Those who might have a particularly tough time getting a mortgage are self-employed homeowners who don't have two years of income documentation, even if they have the income to support the mortgage, Adamo said.

The availability of stated-income mortgages, which don't require borrowers to fully document their income, is limited, he added.

3 Know what

you'll be saving

The old rule of thumb was that your rate should drop two percentage points for a refinance to be worth it, but that doesn't always apply anymore, Adamo said. If you can recoup closing costs of the new mortgage in the first 12 months — and can save three-quarters of a percentage point on your interest rate every year thereafter — it's probably economically justifiable to refinance, he said.

In any case, have a conversation about what rate would make refinancing worthwhile and be prepared to take action. Borrowers also need to consider how long they want to stay in the property to determine which mortgage makes the most sense for their situation, Weaver said.

Sometimes you could be better off refinancing even if you don't get a better rate, Gwizdz pointed out. If you have an adjustable-rate mortgage that resets in a year, but can get a fixed-rate mortgage at the same rate, it's probably good to refinance now if you plan on being in the home for years to come, he said.

He cautions people about refinancing into mortgage terms that extend the life of the loan; doing so may bring monthly payments down but will probably make the loan more expensive in the long term.

"However, for homeowners that must have the lowest payment possible, it may be the right choice when combined with a lower fixed-rate product," Weaver said.

4 Don't count on

cashing out

Tapping home equity through a cash-out refinance is much more difficult these days, due to stringent credit standards and loan-to-value requirements, Weaver said.

According to Freddie Mac, the share of refinances with a cash-out component was 63 percent over the first three quarters of 2008, the lowest level since 2004. Cash-out refinance mortgages have loan amounts at least 5 percent higher than the paid-off mortgage balances.

"The combination of declining home values and tighter underwriting standards have reduced the amount of equity that can be extracted by homeowners this year," Frank Nothaft, Freddie Mac's chief economist said.