YOUR MONEY: Before you refinance, determine if it'll be worth itOf course, to get the lowest rates, you must have a high credit score, generally about 720 or higher.
By: Dan Serra, McClatchy-Tribune News Service
If you are paying close to 6 percent interest or more on your mortgage, the recent drop in rates could warrant consideration of refinancing your loan.
Mortgage rates are at historical lows, with some borrowers locking in rates as low as 4.39 percent. The average for a 30-year fixed rate mortgage has been as low as 4.96 percent this month, according to Freddie Mac, the lowest rate since it began tracking them in 1971.
Of course, to get the lowest rates, you must have a high credit score, generally about 720 or higher.
If you find your lender quoting you a great rate, how do you really know if refinancing makes sense for you?
An easy way to determine the answer is to do what is called a break-even analysis. That is done by taking the total closing costs for the refinancing and dividing it by the difference in your old and new payment.
For example, closing costs of $2,890 divided by a monthly payment that is $105 less equals 27.5. That is the number of months you must stay in the home for the closing cost to pay for itself and make it worth refinancing. So if you planned on moving out in 15 months, the refinancing would not make sense. But if you planned on living in your home for more than two years, your savings in payments would make it worth spending the money for the refinancing. The closing costs are included in the loan so that you're not required to pay any money out of pocket.
If you've done the math and determined a refinancing is worth it, then comes the process of finding the right lender.
First, start with your bank or another financial institution that knows your financial history. The more they know, the less paperwork they may require and the faster the refinancing will take place. But don't just blindly accept the first quote. It may be worth it to ask a few lenders for an interest rate quote. Ask each for a good faith estimate, a document that itemizes the closing costs and gives you an estimate of your new payment. With a few of these in hand you will be able to compare and select the best rate or the lowest fees.
Be prepared to practice patience during this process. The interest rate drop has caused mortgage companies to become swamped with requests. One lender said telephone wait times can extend up to two hours.
(Serra is a financial planner with Strategic Financial Planning Inc. in Plano, Texas. E-mail him at firstname.lastname@example.org.)