Mortgage Rates Fall: Should You Refinance?

After Feds cut interest rates to below 1% on December 16th, mortgage rates fell to the lowest point since 1976. Many homeowners rushed to refinance their mortgages effectively lowering their monthly payments by hundreds of dollars. Should a mortgage refinance be in your future?

The Cost of a Mortgage Refinance

The biggest thing standing between you and a new mortgage is the cost. Remember the fees you paid when you closed on your home, those are the same fees you’ll pay when you refinance your mortgage. So, refinancing your mortgage will cost thousands of dollars – 3% to 6% of your loan amount, according to National City Mortgage, headquartered in Miamisburg, Ohio.
Whether the cost outweighs the benefit depends on how much you save each month on your mortgage payments and how long you plan to stay in your house. For example, if you pay $2,500 in fees to refinance your mortgage and lower your monthly payment by $200, it will take you just more than a year to break even. It only makes sense to refinance your mortgage if you plan to stay in your home longer than the time to break even. If you’re in it for the long haul, refinancing your mortgage is definitely something you can consider.

Who Can Refinance Their Mortgage?

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While mortgage refinancing is perhaps just as attractive, it’s not as easy as it was during the height of the credit boom. First, refinancing options are far more limited with only 15-year and 30-year fixed-rate mortgages available. It makes sense though, since most homeowners want to refinance their way out of the unpredictable adjustable rate mortgages that played a major role in the current economic crisis.
Not only are there fewer choices of loans for refinancing, qualification is also more difficult. Borrowers need to have 10%-20% equity in their homes or a down payment of that amount.
As always credit history plays a major role in qualifying for a mortgage refinance. Borrowers should have good-to-excellent credit scores to get the best rates on a new loan. Subprime refinance loans are rare, perhaps even impossible.

Watch Out for Prepayment Penalties

If your current mortgage has a prepayment penalty, it could cost you more to get out of your current mortgage and into a new one. Work with your lender to negotiate an elimination of the penalty.

Some Struggling Homeowners Will Keep Homes for the Holidays

Freddie Mac and Fannie Mae, two of the nation’s largest mortgage finance companies, have announced they will be halting foreclosure actions for a combined 16,000 households during the holidays. They’ll be taking a break from foreclosure sales from November 26 until January 9.
The two companies will spend the holidays figuring out whether mortgage borrowers qualify for a newly announced loan modification program. The program would help Freddie and Fannie struggling homeowners who are at least three months late on their mortgage payments, have not filed for bankruptcy, and still occupy the home secured by the mortgage. The program only benefits Freddie and Fannie borrowers.

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According to Fannie Mae’s press release, the mortgages would be made affordable through a combination of efforts: reducing the interest rate, extending the loan, or deferring some principle payments. Qualifying borrowers would see their payments fall to 38% of their gross income or less. The program is scheduled to launch on December 15, 2008.
Fannie Mae and Freddie Mac borrowers who have foreclosures scheduled between November 26 and January 9 will be contacted by one of the companies’ foreclosure attorneys. If the foreclosure-scheduled homes are unoccupied, foreclosure will proceed.