With mortgage interest rates continuing to be among the lowest in homeowners' lifetimes, more Americans are refinancing their mortgages. In fact, through July of this year, Freddie Mac and Fannie Mae had refinanced 2.9 million home loans. The vast majority of refinanced loans were fixed-rate mortgages, whether the original loan was an adjustable-rate mortgage (ARM) or a fixed-rate mortgage.
"The good news for borrowers is that 30-year fixed-rate mortgages have been available at interest rates just one-tenth of a percentage point higher than ARMs, offering much greater stability with a long-term rate," said Ewing. "Some borrowers have been able to save even more by refinancing from a 30-year mortgage into a 15-year term, meaning they will be able to pay the loan off much sooner – with much less interest paid – and still obtain affordable monthly payments."
Individuals who are considering refinancing in the coming months should consider these do's and don'ts before starting the process, Ewing said:
1. DO spruce up credit scores: "Check your score before applying for a refinance," Ewing said. Interest rates vary depending on the borrower's credit history, with the best rates going to those with credit scores of at least 740. Those who can wait a few months to refinance can attempt to strengthen their score by paying all bills on time and paying off as much debt as possible.
2. DO think about a shorter-term mortgage: Individuals and families who can afford to pay a little more every month on their mortgage might want to refinance into a 15-year, rather than 30-year, loan. The monthly payment will be higher, but the interest rate will be lower (currently, about one-half percent lower) and overall interest will be less. Additionally, those who have already paid their mortgage for several years will find that choosing a shorter term will avoid "resetting" the length of time until payoff.
3. DON'T stretch beyond your means. Standard guidelines call for keeping housing expenses below 35 percent of total income, and borrowers are wise to stay within that limit. "Be certain that a new mortgage payment will be affordable,"
4. DO consider paying points: Points (or discount points) are a percentage of the purchase price paid upfront to obtain a lower annual percentage rate on the loan. Buyers who plan to stay in the home a long time might find that paying points makes sense. Those who do pay points will find that they usually are tax-deductible on a federal income tax return.
5. DON'T forget private mortgage insurance (PMI). Mortgages with less than 20 percent equity require PMI in case the owner defaults on the loan. If a refinance puts a borrower below 20 percent equity, the lender will add PMI requirements -- either as a monthly payment, as an up-front payment, or both. When the home owner pays a conventional mortgage down to 80 percent or less of the home's value, he or she can request the lender to cancel the PMI and then be able to stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.
6. DON'T count on a high appraised value: These days, lenders are very cautious about overvaluing homes. Appraisers are acting very conservatively, relying on comparative property sales figures from very recent sales. To get the best refinance deal, buyers should have equity totaling at least 20 percent of the appraised value.
7. DON'T rule out government programs. If the home's value has seriously dropped or you have an ARM on which payments have skyrocketed, federal government home loan programs might be able to help. The Making Home Affordable Refinance Program (HARP) allows borrowers with mortgage debt of 80 percent to 125 percent of the home value to refinance, in some cases without paying additional PMI. Visit http://makinghomeaffordable.gov/
"With mortgage rates still in the low 5-percent range, it is a great time to refinance a home," Ewing said. "By following these suggestions, homebuyers can be well prepared to make their biggest investment -- their home -- an even better value."
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