Interest rates home mortgage loans are expected to end 2012 at a very low rate. If you’re considering refinancing your mortgage to save money, you have some time, but the deals won’t last forever. Here’s a checklist to run through to determine if it’s the right time to consider refinancing.1) What shape is your credit in?The best rates and the lowest fees go to those with great credit scores. It’s worth pulling your FICO score and credit reports before you shop around to see what your credit scores are. The official site to receive a free credit report is http://www.annualcreditreport.com.
2) How much is your home worth, and how much do you owe?
Get a list of comparable recent sales in your area. If you’re underwater, meaning the current market value of your home is less than the value of the current loan, you’re unlikely to get an attractive refinancing offer. If your loan is smaller — $100,000 or less — you’re unlikely to save much money by refinancing.
3) Are you selling soon?“It normally takes over 10 years to make your money back when paying a lot of points and fees” on a new mortgage, says Fred Arnold, public relations chair of the National Association of Mortgage Brokers. “Paying points” means you give the bank money up front in exchange for a lower interest rate, something you shouldn’t have to do in today’s record-low climate. Nonetheless, the fees on a refinancing, known as closing costs, can still run to thousands of dollars. Your savings on monthly interest cost may not offset the closing costs if you sell the home and buy a new one within a couple of years.4) Are you willing to drive a hard bargain?“Everything’s negotiable, especially if you shop the loan around,” says Arnold. Available rates change often, even multiple times a day, so it makes sense to get several quotes. At the same time, changes to federal rules in the wake of the housing crisis may have made it harder to get the best deal. For example, the government mandates that a broker offer the same rates for borrowers in similar financial situations to crack down on predatory lending, but Arnold says that has made lenders leery of waiving any fees.When shopping for home loans, ask for a fees worksheet, which should give you a rough idea of the closing costs. You are within your rights to ask for a receipt for any fee for a third-party service, such as an appraisal, notarizing document, or preparing your credit report — this may lower the fees.Another way to lower your closing costs is to pay what’s called a ” yield spread premium.” This is the reverse of paying points. It means you get a slightly higher rate, the bank pays the broker, and the broker charges you less for the loan — or even nothing, called a “no closing cost loan.” Taking this kind of deal may make sense if you think you might have to sell sooner than 10 years out, and if the higher rate is still lower than you’re paying now. “We talk about the rule of 2 percent,” says Arnold. “Your rate should go down at least 2 points to make that refinancing worth it.”
When you look at your monthly payment, remember the mortgage interest tax deduction. If you take out a new loan with a lower rate, you’ll pay less interest. Therefore there will be less to deduct.It’s a great time to refinance a mortgage, but that doesn’t mean it makes sense — or even is possible — for every borrower. Deciding if it’s right for you requires taking a hard look at the costs and benefits.