Refinancing: Take the Low Road

Thinking of refinancing your mortgage? Welcome to the club. With mortgage rates so low over the past few years, the question hasn't been "should you refinance?" but "when"?

While conventional wisdom once said you had to shave at least 2% off your loan in order for refinancing to make sense, these days it could be worthwhile with an interest reduction of just 0.75%, says Doug Perry of Countrywide's consumer-markets division. That's because soaring home values, increased competition and automated underwriting (which can approve or reject your refi application in a matter of minutes) have made refinancing quicker, easier and potentially cheaper than ever before.

Unfortunately, none of this means that your role in the process — namely, making sure that you get the best loan possible — has gotten much easier. To find the best deal, you still need to do your homework, and you need to be smart about the financing options that a lender or broker might pitch you. Otherwise, your refi just might cost you significantly more than it should.

So consider this your crib sheet. We'll give you the lowdown on some of the loan products you might be offered in this refi market, and also give you tips on how to work the system to get the best deal possible.

Timing Isn't Everything

If you're worried that mortgage rates are soon going to rise to the point where refinancing is no longer appropriate for you, you obviously want to lock in a rate as soon as possible. Then, once you have a rate locked for, say, 45 days, probably the best thing to do is to ignore the direction of interest rates. After all, should rates actually drop, you're likely to wind up flagellating yourself outside your lender's office.

 

once you have a rate locked for, say, 45 days, probably the best thing to do is to ignore the direction of interest rates. After all, should rates actually drop, you're likely to wind up flagellating yourself outside your lender's office.

On the flip side, if you truly believe that rates are going to fall, then hold off on locking in a rate. What you most likely don't want to do is get involved with what's known as a "float down" option, which is essentially an opportunity to pay for the privilege of getting a lower rate should rates fall while you're still refinancing. As tempting as these offers might sound, they aren't free. In fact, they'll often cost you another one-eighth of a percentage point on your interest rate. In that case, mortgage rates would have to fall at least one-fourth of a point to make this deal worthwhile. And over a short period of time, that's not likely to happen. "These options often sound so good, but usually that isn't the case," says Joe Kennedy, president of Eloan.com, an online mortgage broker. And that's especially true in this climate, since by nearly all accounts, rates are much more likely to increase than decrease in the near term.

Bottom line? You'll make this process much easier on yourself if you don't worry too much about the direction of interest rates. Instead, find a rate that will save you some money, lock it in and, as Tony Soprano would say, fuggedaboudit. "A good deal today is going to be a good deal tomorrow," says Countrywide's Perry. And, keep in mind, while it may take a little time for rates to drop downward, rate increases happen much more quickly. Says Neill Fendly, president of the National Association of Mortgage Brokers, or NAMB: "The road to you-know-where is paved with people who waited for that last one-eighth of a percent."

Article continued at http://www.smartmoney.com/home/living/index.cfm?story=refinancing

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