Home Economics: A look at the pros and cons of refinancing

Fixed mortgage-interest rates are down to a record 4.09 percent, Freddie Mac reported Thursday - something that doesn't appear to mean much to many Americans these days, because few people are buying houses.

The low fixed rates do, however, offer a good opportunity to refinance your current home loan.

With lenders remaining tight-fisted, home values continuing to decline, and appraisals often falling well below borrower expectations, refinancing sometimes can be a long and difficult process. For some homeowners, it's an exercise in futility.

Still, "the world should not be worried that they cannot refinance," said Jerome Scarpello of Leo Mortgage in Ambler. "We do them every day. It's just a lot more involved."

In today's environment, Scarpello said, borrowers should expect to be asked all sorts of unusual questions. Such as: "Where did the $500 deposit into your checking account come from?" Or, "Why does your W-2 say, 'Caesars Operating Co.' when you work at Bally's casino?"

Appraisals are another issue, he said, because many people are surprised to learn that the value of their homes have dropped to a point where they can't refinance.

"Those who have good credit, equity in their homes, and stable employment - they will get funded," Scarpello said.

For a well-credentialed homeowner, refinancing to such low rates can result in sizable savings - if you are able to find the best deal.

With an eye toward that, Lending Tree CEO Doug Lebda offered these tips:

Maximize your savings by shopping around with different types of lending institutions and multiple lenders, as the actual rates available to borrowers can vary significantly.

Compare actual offers based on your credit and income profile, not just rates from a table. Be sure to assess all aspects of the offers - interest rate, points, and fees - and ascertain that the mortgage products are, indeed, the same.

Research lenders' ratings and reviews; customer service and integrity are key to getting a good deal.

Find a lender who will commit to a specific closing date and has the capacity to fulfill it.

When you refinance, you pay off your existing mortgage and create a new one. You may even decide to combine both a primary mortgage and a second mortgage into a new loan.

Why refinance at all?

According to the Federal Reserve, lowering your interest rate is Reason No. 1.

The interest rate on a mortgage is tied directly to the amount of the monthly payment; lower rates typically mean smaller payments.

For example: The monthly payment on a $200,000, 30-year fixed mortgage at 6 percent is $1,199. At 5.5 percent, the monthly payment is $1,136. The difference each month is $63. But over a year's time, it adds up to $756, and over 10 years, you will have saved $7,560.

A lower interest rate also may allow you to build equity in your home more quickly.

Another reason to refinance? To change the duration of your mortgage.

You may want a longer-term mortgage, to reduce the amount that you pay each month. Increasing the length of time you make mortgage payments may also mean an increase in the total amount you pay in interest over the life of the loan.

Shorter-term mortgages, 15 years instead of 30, typically have lower rates - 3.30 percent, Freddie Mac reported Thursday. You pay off the loan sooner, lowering total interest costs. The trade-off here is that monthly payments usually are higher because you are paying more of the principal each month.

The Fed notes, however, that refinancing is not the only way to cut the term of your mortgage. By paying a little extra on the principal each month, you will pay off the loan sooner, effectively reducing its term.

Many people are using the current low fixed rates to refinance out of adjustable-rate mortgages. If you are refinancing from one ARM to another, check the initial rate and the fully indexed rate. Also, ask about the rate adjustments you might face over the term of the loan.

Still others refinance to take cash out. Financial advisers warn that doing so means you own less of your house.

They also caution against cash-out refinancing to pay down unsecured debt (such as credit cards) or short-term secured debt (such as car loans). You may want to talk with a financial adviser before you choose cash-out refinancing as a debt-consolidation plan.

According to the Fed and others, refinancing is not a good idea:

If you have had your mortgage a long time. It isn't wise to restart the amortization process late in the game.

If your mortgage has a prepayment penalty.

If you plan to move in a few years.

When you refinance, the lender will consider your income and assets, credit score, other debts, the current value of the property, and the amount you want to borrow.

If prices fall, your home may not be worth as much as you owe on the mortgage. Even if prices stay the same, you may owe more on your mortgage than you originally borrowed, which would make refinancing difficult.

"The key is to be up-front with all your information and work with an originator who knows the process," Scarpello said.

For many, he added, "when credit is needed the most, it is hardest to obtain."

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