Refis on the Rise: Time to Take the Plunge?

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housesIn the morass of glum housing news, there is one bright spot: Tantalizing low mortgage rates are continuing to entice more homeowners to refinance. The number of applications to refinance has tripled in the past year, says the Mortgage Bankers Assn.

Refinance applications soared 18% in the week ending Oct. 2 compared with the previous week, according to the Mortgage Bankers Assn. Rates on 30-year fixed rate conforming home loans dropped to 4.89% -- their lowest level in four months. (They hit a record low of 4.78% in the spring.) Some refinance rates are even better for borrowers with stronger credit, say experts."There are only a few times in history that rates have been this low," says Florida real estate economist Lewis Goodkin, who has studied the mortgage industry for more than three decades. "It's really one of the strongest arguments for refinancing."

Financial experts say there are several good reasons to consider refinancing. Lowering your monthly mortgage payments can free up cash for reducing your financial stress, such as repaying other debt and replenishing your retirement accounts.

For older Americans, shortening your mortgage term now could help leave you mortgage-free in retirement, reducing the income you'll need to generate from your 401(k), which was likely battered in the stock market this year.

The average rate on a 15-year fixed mortgage fell to 4.32% from 4.34% in the week ending Oct. 2 compared with the previous week. But experts say there are crucial factors to bear in mind before jumping into refinancing. And borrowers should expect to clear a number of hurdles that didn't exist the last time they applied for a loan.

Most single-family home loans today need to fall within Fannie Mae and Freddie Mac limits. (Loans backed by Fannie and Freddie make up a vast majority of the nation's mortgages.) In most places, that's loans up to $417,000. For jumbo loans that number rises to $729,750. Lower mortgage rates may have homeowners chomping at the bit to refinance, but the process of qualifying for a loan has never been harder.

Banks, still reeling from one the worst financial crises in decades, have installed stricter credit and income standards. That means convincing a lender that you can repay a loan is increasingly more difficult. Credit requirements are more stringent and borrowers with anything but impeccable credit will face higher fees.

Even if your financial house is in order, you can expect delays. Banks are overwhelmed by the rush of business and some lenders are taking up to 90 days or more to complete a refinancing. For homeowners who have HELOCS – a home equity line of credit where lenders agree to lend a maximum amount within an agreed period – waiting for the second lender to agree to the loan could add another few weeks to the process.

Crucial to any refinancing effort are credit scores and your home's current value. Each will determine if homeowners are eligible to refinance and how close they can get to the lowest rates available. Having some equity in your house is also key.

If your mortgage is less than 80% of the value of your home or less than 75% of your co-op or condominium, plenty of refinancing options exist. Determining what your home is worth is trickier now that home values are sinking in some parts of the country.

Some homeowners are finding that their homes have declined too much in value to qualify for refinancing. Folks in this group – estimated to be about 16 million households – will be forced to fork over an appraisal fee to find out if they have enough equity in their homes.

Appraisal fees vary widely, depending on where you live. They can start at about $350 but soar much higher in pricier areas.
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