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To Refinance Or Not To Refinance?

With mortgage rates at historic lows, many homeowners are mulling refinancing. And in this column, The Early Show financial guru Ray Martin says waiting could mean missing a historic window of opportunity. He also spells out refinancing options and ways to keep closing costs down.
Don't Miss This Window to Refinance

In 1958, Dwight Eisenhower was president, the cost of a U.S. postage stamp was four cents, the No. 1 single was "All I Have To Do Is Dream," by the Everly Brothers, "Gunsmoke" was a hit show on television, and a housing boom, fueled by young families moving into the suburbs and the GI Bill making it easier for veterans to get mortgages, was in full swing. The interest rate on a 30-year fixed rate mortgage was around 5.5 percent.

Fifty-one years later, much has changed -- except mortgage rates. In January 2009, the rate on the 30-year mortgage with no points is about 5.5 percent.

According to the Mortgage Bankers Association weekly survey, the average contract interest rate for the 30-year fixed rate mortgage is 4.89 percent, the lowest level recorded in the survey's history. The average contract rate for the increasingly popular 15-year fixed-rate mortgage is around 4.63 percent. To get the rates in the MBA survey, folks paid about 1.2 points. One point is one percent of the mortgage amount, so for each $100,000 of a loan, one point will cost $1,000.

Why are mortgage rates so low? In response to the unprecedented housing and financial crisis, both the Treasury and the Federal Reserve have injected over $100 billion into the mortgage-backed securities market since last fall. The Fed has stated that it may add up to $570 billion more this year. The result is that mortgage rates have dropped almost a full percentage point since this time last year. These actions, if fully rolled-out, would have the effect of creating a market for mortgages at low rates, keeping pressure on mortgage rates to the downside, and possibly driving mortgage rates lower.

While mortgage refinancing applications have been shoeing a strong increase, according to sources at mortgage lenders, many folks are still waiting around for even lower interest rates. Some are thinking the rate could go to 4.5 percent or lower, and are waiting to catch the bottom.

But homeowners who have a mortgage with a fixed rate of 6 percent or more need to get busy thinking through their refinancing options. Folks with adjustable rate mortgages should not miss this opportunity to lock in the certainty of a low fixed rate, even if their current rate is lower than the fixed rate.

Here is another thing to think about: If you wait to try to "catch the bottom" and, while you wait, your financial condition unexpectedly takes a turn for the worse (you lose your job, etc), then you may not qualify to refinance and could miss out on what could be the lowest mortgage rates in a generation of homeowners.

Another factor worth considering: the pressure on home values continues to be downward. It's advisable to refinance your mortgage now at your home's current appraised value, as opposed to risking a further decline in value.

Homeowners with larger mortgages should definitely look at refinancing again, even if they refinanced in the last year or two. The monthly savings from lower interest rates for larger mortgages are greater and can recover the costs of a refinancing transaction sooner.

The bottom line: Considering Refinancing if:

1) Your current fixed rate is over 6 percent, and
2) The savings created by your new lower payment recoups the closing costs in 24 months or less.

or

3) You have an adjustable rate mortgage set to adjust before you plan to sell the house.

Mortgage Refinance Options

Many homeowners falsely assume they would not benefit much from refinancing or that they cannot refinance because their credit is poor, their home's value has fallen too much, or they lack the cash to cover the closing costs.

First thing first: Refinancing options for folks who are unable to prove their income and assets with verified financial documentation and references will struggle to find any reasonable refinancing options.

Expect to be required to provide full documentation of income and assets with your mortgage application. These requirements will include three months of pay statements and at least two years of tax returns. Qualification requirements may also include having reserve assets equal to six to 12 months of mortgage, insurance and tax payments. In most cases, 70 percent of retirement account balances count towards this requirement.

But if you can provide documentation of the income and assets required, your credit score is 700 or higher, have no late payments, your mortgage loan amount is less than 80 percent, and the loan amount is not more than $417,000 (up to $625,000 in designated high-cost markets), then you'll have plenty of refinancing options available as your situation and mortgage will be "Conforming."

But what about folks whose mortgage and financial situation is "non-conforming"? There are mortgage products offered through Fannie Mae and Freddie Mac that accept folks with full financial documentation, credit scores of around 680, no late payments in the past year, and loan-to-value ratios up to 90 percent. Expect to pay an additional one-half of a percent in the form of a mortgage insurance premium.

Homeowners who do not qualify for these mortgage refinancing programs should consider refinancing options through the Federal Housing Administration. Folks who qualify with full documentation of income and assets, with credit scores of 580 (in some cases lower), one late payment over the past year and a loan-to-value ratio of up to 97 percent can find reasonable options here.