Refinancing: No time like now, but keep your eyes wide open

The landscape of refinancing has changed dramatically in recent months, but the reason for doing it remains largely the same. "It was about the dollars," says Owen Metz, 26, of Plymouth, Minn., who dropped his monthly payments by $150 when he refinanced earlier this month. "Anytime I can save money now -- it's almost a no-brainer."

The number of Americans refinancing their homes has been dropping recently. The Mortgage Bankers Association reports a 30% year-over-year decrease Christmas week, and a slight decrease the next week, after interest rates inched past 5% and tougher loan qualification measures took effect.

But refinancing is still an attractive option for many, and loan brokerages and analysts agree on a strategy: Move quickly, but cautiously.

"2009 was a better time, but 2010 is still a good time to refi those vintage 2007 and 2008 rates over 6%," says Jay Dacey, the Minnesota mortgage broker who handled Metz's refinance.

Refinancing in an uncertain era

As the recession eases, and the U.S. gradually stops propping up the mortgage-backed securities market, interest rates may rise from last year's bargains. Last week, Boston Federal Reserve President Eric Rosengren predicted rates could increase three-quarters of a point as early as this spring.

Refinancing also may offer a welcome antidote to homeowners suffering symptoms of a recession hangover: debt, job insecurity, or short-term adjustable-rate mortgages about to reset to higher rates.

Keith Gumbinger, VP of financial publisher HSH Associates, calls the strategy a "pre-emptive refinance."

"We're not talking about draining the equity out of your home, but merely replacing old debt with new debt -- albeit at a lower rate and with a longer term over which to repay it," he says. "Your indebtedness isn't growing, but your ability to manage the debt you have can be improved."

Stability and other goals

While refinancing is no longer the top option for those in debt, it's still on the short list, says Cate Williams, a credit counselor at the nonprofit Money Management International in Chicago. "It's always an option," Williams says, "and it's a good option, because it gives stability."

Williams asks clients interested in refinancing a battery of questions about their expectations: Why are you doing this? Are you looking for a significant rate change? Are you looking to get your payment down? Are you looking to get cash? "I still stick with 'You've got to be able to come down two points, and stay in the house three to five years, to gain any benefit,'" Williams says. "Otherwise, every time you refinance, you re-buy the house."

Before clients go any further, Williams asks them to order their credit report and "hold it up to the mirror," to see if anything might alarm lenders. That's because these days, refinancing is a dramatically different experience from what it was a year ago -- and even a month ago.

For mortgage bankers Equity Now in Manhattan, refinancing is now more work for less return -- particularly since mid-December, when government-based mortgage lender Fannie Mae reduced both allowable debt-to-income ratios and the percentage of investments that count as reserves.

Loans Down, Red Tape Up

"The biggest difference is documentation," says Matt Hackett, underwriting manager at Equity Now. "A few years ago, it was just a credit report and check on their job. Now, they should expect to provide pay stubs, W2s, two years of tax returns, two months of their asset statements. Before, instead of calling to verify someone's employment, you could get two pay stubs instead of one. Now you have to get two pay stubs and call."

Professionals are largely accustomed to such demands, but residential homeowners aren't, Hackett says. "In the past, they talked to their loan officer maybe five times. Now, he's calling them back again and again ... it's got to be at least double." And the shift also means homeowners must take a more active role in refinancing, using calculators (such as this one from to determine the feasibility of refinancing.

Still, many rates and fees are negotiable, says personal-finance columnist Kathy Kristof. "Given the amount of money that's at stake, the hour you spend checking around could be the best compensated time of your life," she says.

Dealing with Appraisals

Another minefield: appraisals. Home values are appraised more skeptically than usual, which creates problems for builders, owners, and anyone with a stake in home prices and loan availability. "Back in the high times, there was pressure on appraisers to come in high," says Bernard Markstein, VP and senior economist at the National Association of Home Builders. "Now the appraiser figures nobody is going to criticize them for coming in too low."

Markstein advises homeowners to do their own "comps" -- checking recent sale prices of comparable homes -- a process streamlined by online access to the Multiple Listing Service.

Stay vigilant throughout the loan process, says Ritu Agrawal, chief investment adviser at the Money Ladder Inc. "When credit is tight, banks may deny your application on technicalities," Agrawal says. "If you keep track of the process, you'll be able to resolve issues earlier."

Homeowner Metz, for instance, had to advocate for a higher appraisal with a homegrown spreadsheet itemizing his many home improvements. "I had to substantiate the improvements we made, and the appraiser had to be a little more creative," he said.

Less Equity, More Uncertainty

For those with less home equity, refinancing options include HARP, the underused U.S. Home Affordable Refinance program: a refuge for homeowners with loan debts of up to 125% of their home value. It's offered only for mortgages backed by Fannie Mae and Freddie Mac (check on your loan here) and is set to expire at the end of June.

Greg McBride, senior financial analyst with, calls HARP "the Rodney Dangerfield of the home assistance programs," overshadowed by the government's loan-modification program known as HAMP (Home Affordable Modification Program).

Whether through HARP or traditional routes, McBride recommends refinancing particularly for owners with adjustable-rate mortgages -- even if those ARMs aren't due to reset soon. "We've seen this movie before -- we know interest rates are going to go up, and when that happens, there are going to be homeowners blindsided by a big payment jump," he says. Many who got an ARM and intended to move up to a larger home before it adjusted may find themselves stuck, he says.

Fixed-rate loans may have stricter qualifications than ARMs, McBride says, but they shield homeowners from the uncertainty of ARMS.

New Focus on Credit Scores

Credit scores have taken on additional import, as they're increasingly tied to interest rates and other loan terms. Dale Robyn Siegel, a broker and attorney in New York, says lenders may, for example, require a 20% down payment from homeowners with scores between 620 and 640.

The continued uncertainty of employment prospects this year is another reason to consider refinancing now, says Siegel, author of The New Rules for Mortgages. "If the only means of creating a reserve is home equity, it would be best to go through a refinance process before losing a job, because it's next to impossible to get a loan afterward," she says. "And if you don't lose your job, at least you got your finances in order for 2010."

Some brokers and credit counselors recommend improving your credit score before trying to refinance. Even if average interest rates rise in the interim, the homeowner may wind up with a better deal. "The best rate means nothing if you can't close the loan," notes Todd Huettner, a Colorado loan broker.

Do's and Don'ts

Liz Bayer, a broker in San Rafael, California, gives her clients a do's-and-don'ts list to consult during the loan process, so they don't inadvertently lower their scores. Among her tips: Join a credit watch that will alert you to changes in your credit report, and don't apply for a new credit card or consolidate debts.

And if you can't have a great credit score, significant home equity, or a large down payment simultaneously, take heart -- the experts can't always get the stars to align, either. Jan Green, a real-estate broker in Scottsdale, Arizona, learned she couldn't qualify for a refinance, because both her income and her home value dropped as Arizona home prices cratered. Green succeeded with a different strategy: "Instead of refinancing my 6.25% rate, I sold my house, took the equity, and am buying a different home for half the price I sold the other one -- and I'll be getting a 5% rate."
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