To Refinance or Not to Refinance?

With interest rates for 5 to 30 year mortgages approaching amounts lower than 5%, thousands of home owners are faced with the age old question, "To Refinance or Not to Refinance?"

Currently banks are overwhelmed with mortgage applications, and about 80% of which, are for refinancing. It can be a tough call. Refinancing can result in steep penalties, but if the interest rate is low enough, you may free up some much needed cash flow. Just like any investment, refinancing is not something to be entered into without doing your homework.

Here are some key points to consider before you take the next step:

Rates have not hit 4.5% as yet, but they are close. You may want to decide whether it's worth waiting a little longer. Also, that 4.5% that they are throwing around, is an estimate. Larger loans above $417,000 will fall under a higher rate structure. It may also be worth your while to pay down your loan if you fall under one of the higher rate categories.

Lending terms are much more strict than a few years ago. Get your ducks in a row and ensure your credit is in good shape before applying. Three main credit agencies, Experian, Equifax and TransUnion will provide one free annual report and more copies may be obtained for about $10.

Nowadays, most lenders require 20% equity in a home before approving. If you have less than that, you may be required to make up the difference.

Add up the costs of refinancing (the points, appraisal and closing costs) and determine how long it would take to recoup those costs with your new savings. If you don't plan on remaining in your home that long, refinancing may not be the best move.

When you get a new rate quote from the bank, pay close attention to the points you need to pay. For example you may get a quote for $5.124% with no points, and 4.874% with 1 point. The value of a point equals 1% of the loan amount. Even thought the second quote is for a lower rate, it may not be worth it in the long run when you include the extra cost of the point charge.

The new rate should be at least 1% lower than your existing rate.

To save closing costs, ask your lender if they will consider renegotiating the terms of your existing mortgage without going through a formal application process.

Shop around for the best rates. Don't overlook the smaller banks and credit unions – they too are competing for your business.

Before you make a decision, sit down with a financial planner or lender. Take a copy of your current mortgage and have an up to date idea of what your home is worth.

by Carolyn Capalbo