When a Refinance Is Worth It

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Mortgage rates are once again bumping along the bottom, with the 30-year fixed-rate loan going for an astonishing 4.775%, according to the BankingMyWay survey.

Of course, that doesn’t mean anything if you’re not shopping. Many people are too leery of the weak housing market to buy. But low rates are always tantalizing to anyone who already has mortgages and would like a better deal. These days, about three quarters of newly issued mortgages are for refinancing rather than purchase.

But there are some potential snags. One of the biggest: Your home may not be worth enough to qualify for a new mortgage. The home you bought a few years ago for $400,000 may be worth only $300,000 today. That means the biggest loan you’re likely to get would be $240,000, or 80% of $300,000 — probably not enough to pay off the old loan.

Obviously, it would be a mistake to pay out non-refundable application and appraisal fees if there’s little chance you’ll get a new mortgage in the end. So it pays to do some research into your home’s current value before you start the process. Try Zillow.com, and focus on comparable nearby homes that have sold in the past six months or so, since older prices may be higher than today’s.

If you plan to boost your home’s value with improvements, finish them before the appraiser comes, as he has no way of knowing what your gutted kitchen will look like later.

What if you find your home is worth less than you owe? About one-quarter of homeowners with mortgages are in this boat, according to experts. To refinance, you’ll have to come up with some cash to close the gap between what you owe and what you can borrow.

That’s a deal-killer for many homeowners. The idea of sinking more money into a home that’s already lost tens of thousands of dollars is not one bit appealing. And many people simply don’t have that kind of cash lying around.

But if you do have some money, does it make sense to put it into your home under these circumstances?

Not unless you already have a solid rainy-day fund, enough to get you through an emergency like unemployment lasting six to 12 months. It also would not make sense to sink more money into a home you’re likely to lose in a foreclosure.

But if you expect to stay in the home, the decision boils down to the return you’d earn by putting more money into it. If the old loan charged 6%, the extra money you put down will be earning 6%, since it will allow you to escape interest charges at that rate.

That’s not bad for a guaranteed return. A five-year certificate of deposit pays just more than 2%, according to the BankingMyWay survey, and a 10-year U.S. Treasury note yields only 3%. You might beat 6% in stocks, but with much more risk.

Of course, money put into your home is hard to get out, so think about college costs, retirement or other big expenses in the years to come.

Use the Refinance Breakeven Calculator to explore the math, and keep in mind that that putting money into your home for a refinancing reduces your monthly payment two ways — by cutting both the debt and the interest rate.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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