Refinancing Your Mortgage: When It Makes Sense

[Joseph Scorese]

Refinancing Your Mortgage: When It Makes Sense

Important considerations for when refinancing is a good financial move.

Refinancing your mortgage can offer a way to take advantage of low interest rates -- or, if your mortgage payments have become oppressive, an escape from adjusting rates, increased payments, or reduced income. With property values falling and companies tightening their belts or even laying off employees, there's no better time to make sure your mortgage meets your current budget and long-term needs.

What Is Refinancing?
When you refinance, you get a new mortgage to replace your existing mortgage. Because you're getting a brand new loan, you usually have to pay title insurance and escrow fees, lender fees, points (optional), appraisal fees, credit reporting fees, and any amounts needed to bring your insurance and tax obligations up to date.

Why Refinance?
Homeowners refinance for many different reasons, but here are some of the common ones.
Refinancing can save money by lowering your interest rate. If the interest rate on your current mortgage is higher than the current market rate, you'll pay less by refinancing.

Who Can Refinance?
If you have sufficient equity, you can refinance. A new lender will consider the same factors your original lender did: your income, debt-to-income ratio (how much of your monthly income is spent paying off debts other than the mortgage), your home's value, how much equity you have in your home, and your credit score.

Refinancing is much harder than it once was, for a few reasons. Some borrowers have difficulty refinancing because they have insufficient equity, mostly because the value of their property has not returned to an amount that exceeds what they owe on the mortgage. And lenders have become surprisingly strict about how much they'll lend, usually requiring refinancing homeowners to have at least 5-10% equity in the home.

Another problem is that lenders have made "stated income" loans all but unavailable. With stated income loans, borrowers didn't have to provide independent verification of their income. Instead, the amount they could borrow was based on the income they claimed to have (hence their nickname, "liar loans"). These were intended for people who had a hard time verifying income, such as the self-employed. But in recent years, borrowers used stated income loans to artificially inflate their income to qualify for bigger mortgages. Unless their income or equity have increased substantially, borrowers currently holding this type of loan will have a hard time qualifying for more traditional refinance mortgages for similar amounts.