Refinancing: Tempting, but Beware

Many homeowners are trying to take advantage of historically-low mortgage rates.

The Mortgage Bankers Association says applications to refinance home loans are at a 15-month high.

The reason? Simple! Those record-low rates, says CBS News Business and Economics Correspondent Rebecca Jarvis, who notes the average for a 30-year fixed-rate mortage is 4.4 percent, and the average 15-year rate is below 4 percent, art 3.92 percent!

Still, says Jarvis, there are important factors homeowners need to consider before jumping in to try to refinance.

For one thing, there are significant COSTS involved in refinancing.

The two biggies:

-- Closing costs: These are UP 36 percent since last year. The average closing cost on a $200,000 mortgage is $3,741.
-- Prepayment penalties: Read your current mortgage note to see if this applies to you. They can be as much as six months' interest on the original mortgage amount. On a $200,000 mortgage, that can be more than $6,200.

ALSO, it's important to realize that, even though refinancing may lower your monthly payments, if you change the term of the loan -- meaning the time frame over which you pay it off -- you could end up paying MORE in the long-run.

With those factors in mind, if you do the math and decide it would still pay to refi, be aware that, in the current economic environment, lenders are tightening up, and it's become even harder for people to qualify for a loan.

Also, if you want a good loan, you need a good credit score - ideally one above 720. If your credit score is below 700, refinancing may not make sense for you, because banks won't give you good deals.

The value of your home and amount of equity you have in it stand as biggest hurdles to refinancing. If you owe more on your mortgage than your home is worth. it would be very difficult to refinance. To refinance, you'd have to come up with some cash to close the gap between what you owe and what you can borrow. That should factor into your decision on whether it's worth it to refi.

Your income also plays a role. The typical rule of thumb is that your new mortgage payment, including taxes and insurance, should amount to less than 30 percent of your gross monthly income.

If you want to move forward, there are some great resources online to help you:

Zillow.com is a great site to give you a general sense of the value of your home. Eventually, if you're going to refi, you'll have to get it appraised, but Zillow can give you a sense of where it may be valued, because it lists other properties in your area that have recently been sold.

The Federal Trade Commission site has useful mortgage comparison worksheets, so you can keep all your info in one place and know which things are most important.

Bankrate.comhas mortgage calculators and comparison shopping - it's a great site.
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