When and How to Refinance Your Mortgage


If you're considering refinancing your mortgage, prepare to pay up in the short term.

The reality is that no matter how frugal and financially responsible you’ve been, these days banks will slap you with refinancing fees. A good credit score, proof of income and equity in your home may enable you to negotiate a low interest rate, but refinancing charges are harder to haggle down.  

Consider the story of an actual couple, who wish to remain anonymous. Let's call them Bob Smith and his wife Sue, both 40. They are among the country’s forgotten homeowners.

This upstate New York family agreed to an affordable mortgage six years ago and have since never missed a monthly payment. They resisted material temptations and lived beneath their budgets. (Meanwhile, foreclosures are up, one in seven property owners owe more on their mortgage than their home is worth and Americans owe some $1 trillion on their credit cards.)

Now, with interest rates at historically low levels the Smiths have applied to refinance their mortgage, but say it feels like they’re getting punished with thousands of dollars in upfront fees. “The upfront costs are ridiculous,” says Bob. "I can’t figure out if the timing is right or if we’re even getting good terms."

Good credit or bad credit, almost all banks will charge some type of refinancing fee.

And, as a recent article on our sister site BankingMyWay points out, government-backed mortgage lenders Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE)  are charging a premium on higher risk loans.

Any borrower with a score below 740 will get hit with extra fees, and anything below 700 is now considered a substantial risk. Depending on a combination of your credit score and the ratio of the amount of your loan to the value of your home, your upfront costs might increase by up to 0.75 of a percentage point of your new loan. (On a $200,000 loan, that translates into an extra $500, $1,000 or $1,500 in closing costs.)

How to Decide
The most important question to ask when deciding if refinancing is worth it is, "How much longer do I plan on living in my house?"

If the upfront refinancing costs outweigh the savings, given the length of time you plan to continue living in the house, then refinancing wouldn’t make sense.  But if it would be financially beneficial to you, don’t worry about timing, as Bob points out.  Experts say you can’t control the future of rates or whether more significant help is on the way.  In this economic climate, now more than ever, households need to proactively protect their financial lives.

“If you can refinance today, take the opportunity and don’t wait for the government or any institution to help you,” says mortgage advisor and Internet talk radio host Joe Gross.  “At the end of the day those are all long shots.”

For help, check out BankingMyWay.com's refinancing calculator.

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