Mortgage Refinancing

In the past few weeks a number of people have asked me if I thought this is a good time to refinance the mortgage on their home. As normal one answer does not fit all situations. There are so many factors that have to be considered in making a reasonable decision given all the facts. And even when all the facts have been considered the decision is made more difficult by pending legislation and the possible impact on interest rates. We will talk about this later but first what are the questions to ask about refinancing.

• Is the value of your home, given the current housing valuation decline, worth more than your current mortgage? One would need at least 20% equity in house to even give any consideration in refinancing.
• What is your credit rating (score)? If it is below average (below 700) lenders will probably not even consider allowing a refinance or if they do it could be at a higher cost. During this credit crisis lending institutions are only willing to lend to those with the highest credit rating.
• Can you qualify with the stricter earning tests? Is your income high enough in the eyes of the lender to make the monthly payments? The days of easy underwriting of mortgages is over. The historic rules of thumb of housing payment not being more than 28% of gross income and overall debt load payments not more than 35% will be enforced.
• How long do you plan on living in your house? You will need to live in your house long enough for all the refinancing costs to be made up over a fairly short period, three year, with the lower monthly payments.
• How stable is your current employment? If your job is vulnerable it does not make much sense to refinance because a loss of job could cause relocation and the inability to sell house and make the payments.
• What types of mortgages do you currently have on the house? If you purchased your house with an adjustable rate mortgage or an interest rate only loan it behoves you to get into a fixed loan before they reset but you probably will be shut out by one of the factors stated above.

Refinancing will probably only work for those that have lived in their homes for a number of years and have built up equity in them and have a strong credit rating. If you have made it this far and think you can qualify for refinancing is this the time to do it? I don't have a crystal ball. Will the interest rates go lower because of the stagnant economy, the potential legislative action or the work of the federal reserve of buying up bad loans?

I think the direction of interest rates needs to be put out of your thought process if you are serious about refinancing that will save you on the monthly payment at current low rates. If this is the case why would you wait hoping for the rates to go lower. We are in historical low interest rates and hoping for them to go lower just seems counter intuitive. It is possible the rates could go much lower but again they are at very low rates now.

If you lock in a rate that lowers your monthly payment then I would celebrate and not worry what the rates do in the future. If rates go down to 4% you can celebrate the additional savings when you refinance again. Take advantage of what is given to you now and not worry about what it will be in the future. "A bird in the hand is better than two birds in the bush."