- With mortgage rates at a 30-year low, the word is: Act now.
Ken Dolan says the time is right to refinance:
"Don't wait. A bird in the hand is worth two in a bush. It's a very volatile economy out there and, with a possible recession and signs that the housing market may be cooling off, these rates could rise just as easily as go down."
- Beware of prepayment penalties.
Daria Dolan explains:
"Some new ARMs (adjustable rate mortgages) that change the amount you pay periodically over the course of the loan, have pre-payment penalties if you refinance your loan in the first three to five years, and a few can even penalize you if you sell your home in that time period. You may have to pay a penalty of 3 percent of the principal or up to 6 months of interest. So read the small print."
Other points to keep in mind:
Managing Your Money
- You don't have to get private mortgage insurance unless you have less than 20 percent equity in your house.
The Dolans explain that private mortgage insurance (PMI) protects the lender in case you default on your loan, and the cost is typically one-half to three-quarters of a percent of the loan amount. If you don't own 20 percent of your house, your lender will require you to buy PMI.
- Check your current mortgage and see if the equity in your house exceeds 20 percent, because right now few mortgage companies tell you when you've passed that 20 percent mark or how to cancel the insurance.
(The good news is that Congress has adopted tougher new rules for insurance companies' PMI policies and, starting in the next few months, lenders will have to notify their customers about their cancellation rights.)
- You can sometimes take advantage of your current mortgage lender to get a good deal on refinancing.
Daria Dolan explains:
"If your original lender stills holds your mortgage (mortgages are often sold to other mortgage holders.), ask for a 'mortgage modification.' That's a new mortgage from them at a lower rate without having to pay refinancing costs."
- A mortgage modification means a lower monthly payment. But the rate is not usually as good as you can get elsewhere, so you aren't necessarily that far ahead.
The Dolans say it's an advantage if you don't know how long you'll b staying in your house or if you don't have the money for closing costs.
- It's not a good idea to borrow more than 80 percent of the value of your house.
When refinancing your house, a popular loan in the last few years has been the "125 percent" loan, which means you can borrow more than your house is worth and use the money for things like a car or a college tuition or to consolidate debts.
Ken Dolan says:
"We think they can be dangerous. First, if you're using it to consolidate debt, and don't change the behavior that got you into debt in the first place, eliminating your home equity stake may increase your probability of filing for bankruptcy and, in an economic downturn, which seems likely now, people with little equity in their house end up in foreclosure far more frequently than others.
- You can get tax breaks when you refinance your mortgage.
According to Daria Dolan, in refinancing, "points" (money paid up front and deducted from your income tax) can be deducted in the year that you refinance as long as you use the proceeds to improve your home.
You must pro-rate the deduction over the life of the loan if you use the money to reduce credit card debt, for example, or if you're switching from an ARM to a fixed rate mortgage.
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