7 obstacles to refinancing
Some are more difficult to overcome than others, but first things first: Take the initiative to look into it.
With mortgage rates at historic lows, refinancing your home loan can be a really easy way to save a bundle of money. Unfortunately, there are a number of obstacles that can prevent many homeowners from refinancing.
We put together a list of seven of the most common problems, along with some suggestions on how to overcome them:
Just do it. The first obstacle, and the easiest one to fix, is taking the initiative to refinance. Many people fail to take advantage of lower interest rates because they just aren't paying attention, wonder if refinancing is the right move, or have one of a hundred other excuses. If you've been putting off thinking about refinancing, now is the time to take a hard look at an opportunity that could save you thousands of dollars and significantly lower your monthly expenses.
Low credit score. For the best rates today, you want a FICO credit score of at least 720. The magic number used to be 680, but that changed over the last couple of years. If you don't know your score, there are easy ways to get your free FICO score. And if you do know your score and it's below 720, put into action now ways to improve it. And remember, you don't have to have a score of 720 to refinance, but that's typically what it takes to get the best available rate.
Low home value. This is the hardest obstacle to overcome on this list. With housing values well off their highs of several years ago, many homeowners find that they owe more than the appraised value of their home. Others may have some equity, but not much. These can be significant impediments to refinancing. There are, however, a few options.
- If you get an appraisal that you believe is just wrong, most banks have a process to re-evaluate your home's value. While the odds of getting it changed may not be great, it's at least worth a try.
- If you have some equity in your home, you may be able to structure the mortgage into two pieces -- a first mortgage and a second equity loan or line of credit. The second loan will have a higher interest rate, but the balance on the second loan will be much smaller than the first, and you may be able to pay it off early.
- Loan modification programs are available for those who owe more than the value of their home. While these programs have had limited success, they are available and worth considering.
High interest rates. The good news today is that high interest rates aren't a problem. The general rule of thumb is that you should be able to save at least one percentage point on your loan by refinancing. Unless you got your loan recently, this shouldn't be a problem with today's rates. And even a drop of 0.5% on your mortgage rate can be well worth the cost of refinancing if you plan to stay in your home for several years.
Hoping For lower rates tomorrow. Waiting for lower rates really is not so much of an obstacle as it is just driving yourself nuts trying to guess where interest rates might go. As low as rates are today, some still see them going lower. With things like quantitative easing, the Fed's fancy term for buying U.S. debt, some see more room for rates to go lower. But guessing the future of interest rates is a lot like trying to predict the future of the stock market -- a real gamble. If you can accomplish your financial goals at today's rates, why not refinance? Yes, rates can go lower, but they can also go higher.
Refinancing fees. The cost to refinance a mortgage varies by state and mortgage company. Some fees are unavoidable, while others can be negotiated. The key to understanding the fees is to determine how long it will take you in lower interest payments to recoup the fees you'll pay. This is an important calculation, even if you wrap the refinancing fees into the new loan. As a result, it's almost never worth refinancing if you plan to move in a year or less. Depending on how much interest you'll be saving, it typically takes between two and three years to recoup your money. Your mortgage broker can do the calculations for you.
Uncertainty about how long you'll stay in your home. As noted above, assessing whether refinancing is worth the fees depends on knowing how long you'll be in the home. For some, that's an easy assessment to make. But for those in the military or in a job that moves them around a lot, it can be a tough call. All you can do is make the best estimate you can, and then evaluate the cost of the refinance.
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