Do Your Homework before Refinancing Mortgage, Experts Say

By Alison Knezevich

RISMEDIA, January 20, 2009-(MCT)-With mortgage rates near historic lows, refinancing seems like an obvious way to cut costs, but homeowners should consider many factors before they refinance-and everyone’s situation is different, bankers and others say.

For the week ending Jan. 9, the average interest rate for 30-year fixed-rate mortgages was 4.89%, down from 5.07% the week before, the Mortgage Bankers Association said last week.

Local banks are staying busy as borrowers look to take advantage of those numbers.

“We have seen a drastic increase in inquiries and applications for refinancing,” said John Long, senior vice president of mortgage lending at City National.

Chase recently has experienced a three-fold increase in the number of people asking about and applying for refinancing, said spokeswoman Nancy Norris.

“We’re in the middle of a re-fi boom, but not quite as big as we saw three or four years ago,” she said.

Real estate agent Alan Pennington of Great Expectations Realty said the low rates are helping with home sales. He recently sold a house to a doctor, who opted for a more expensive house than he originally planned because of the low rates.

Pennington’s rule of thumb for refinancing: Consider it if you can get an interest rate 2 percentage points lower than your current one, especially if you plan to live in your house at least five years.

However, there are many other factors to mull over, including closing costs, how long you plan to stay in your house, and how many points you will have to buy.

“The best thing is to sit down with your banker,” Norris said. “They’ll go over the numbers so you can make an informed decision.”

As with anything, read the fine print on any refinance offer, said Assistant Attorney General Kim Stitzinger Jones of the Consumer Protection Division.

She recently got an offer in the mail that would lower her monthly payments by $55, but the plan also would require her to buy 2 points, which each equal to 1% of the amount of a mortgage loan. That could add up to a lot of money when combined with closing costs.

“You have to be careful in the offers you get,” she said. If you don’t read carefully, “it starts to look like something better” than it is.

Closing costs can be severe on fixed-rate mortgages, Long said. “They can run as high to 2 1/8percent3/8 to 3 percent of the loan amount,” he said.

That’s why it’s important to consider how long you’ll stay in the house.

“For example, if you’re going to lower your payment by $50 a month, and your closing costs are $3,000, then it will take you five years to break even,” Long said.

Also keep in mind that you might not be eligible to refinance, Long said.

“Credit qualifications have tightened drastically,” he said. “The rejection rate is higher than I’ve ever seen it, … but many people do qualify, and it depends on their credit.”