This Is the Right Time to Finance

Mortgage rates are at their lowest levels ever, making this a great opportunity to refinance. However, those who want to refinance in today’s tough lending environment face hurdles. Credit scores must be higher than they used to be. Debt loads must be smaller. Employment must be documented. The biggest obstacle is a lack of home equity. Some people owe more on their mortgages than their homes are worth. They’re considered "underwater." Banks aren’t inclined to lend to them. But for those with stable jobs, extra cash, little debt and some home equity, low rates could allow for sharply reduced mortgage payments.

 

The lowest rates are generally reserved for those with credit scores of 720 or more, said Mark Goldman, a Southern California mortgage broker who lectures at San Diego State University. About 40 percent of US homeowners have scores that high.

You’ll also typically need at least 10 percent equity in your home. Depending on where your home is, the required equity might be as high as 20 percent. “Only the select few can qualify," said Goldman.

 

If you’ve been paying your mortgage for 15 years or more, it’s sometimes not wise to refinance. In the latter years of a mortgage, a larger portion of your payment applies to principal. That builds equity. If you refinance late in your loan and don’t reduce the loan’s duration from, say 30 to 15 years, you’ll build less equity. In some states, you might also face prepayment penalties if you pay off your mortgage early or refinance. In some cases, though, these penalties can be waived.

 

Homeowners need to produce pay stubs and bank statements to document assets and income. Lenders generally frown on household debt that exceeds 45 percent of a family’s gross income. A solid credit score of at least 680 is also important, said Mike Anderson, a broker. That’s because lower credit are typically subject to higher extra fees. "Once you get below 680, it gets dicey," said Anderson. "With all the add-on fees, it may not be worth it." The low rates, if they can be had, can produce big savings. A homeowner would have to pay roughly $1,074 a month for a 30-year, $200,000 fixed mortgage at 5 percent. If that rate were cut to 4 percent, the payment would drop to $955. The savings would be $119 a month, or $1,428 a year.

 

Homeowners typically pay a few thousand in closing costs. An appraisal fee can cost 1 percent of the loan value. Extra costs include application, inspection, notary and recording fees. These fees, called points, now average 0.8 point on a 30-year fixed mortgage. One point equals 1 percent of the loan amount. That means the 0.8 percent in extra fees on a $200,000 loan would run $1,600. An example of how fees can increase costs: This week’s average rate on the 30-year fixed mortgage is 3.94 percent. It’s the first time it’s ever been below 4 percent. But once extra fees are added in, the effective average rate rises to 4.12 percent.