Top Tips for Refinancing a Mortgage

RoadFish.com men’s lifestyle and finance magazine urged readers to seek the advice of expert’s tips if they are considering taking advantage of the 60-year low in mortgage rates by refinancing a home mortgage.

SmartMoney.com released four tips for people thinking about refinancing their mortgages, suggestions that are aiming to make the process easier and hopefully save the borrower as much money as possible.

Ruth Simon of SmartMoney.com reported that mortgage rates hit a low last week of 3.84%, down from 4.22% in March and the lowest the U.S. economy has seen in 60 years. Simon states that due to the record-low rates, the time has never been better to refinance a home mortgage. The article states that nearly 20.5 million homeowners currently possess mortgages with a 5% interest rate or higher, and 12.9 million borrowers’ rates are between 4-5%. However, Simon warns that it may prove difficult for responsible homeowners and borrowers—even ones with a good credit score and who make timely payments—to refinance mortgages due to low appraisals and increasingly strict lending measures.

To give borrowers who are considering a refinance some guidance, Simon offers four tips designed to help folks who are wading through the refinance process have an easier time, and save them the most money.

The first tip is to repair one’s credit score, so that the borrower can clean up any errors and get the report looking as good as possible. Borrowers are shooting for a score of 740 or higher to get the very best rate. Fair Isaac spokesman Anthony Sprauve is quoted as saying, “Someone with a higher score who misses a payment could take a bigger hit than someone with a lower score, because there’s further to fall when they stumble.” Assessing your report and score in advance and fixing mistakes could therefore be crucial in the refinancing process.
RoadFish.com’s Senior staff writer is quoted as saying, “I am pretty astounded at how low the mortgage rates have dipped. I have lots of friends and family both house hunting and refinancing their mortgages, and I’m really happy for them because they are going to be getting some amazing deals. Even my parents and in-laws have refinanced their mortgages. The interest rates are hard to look at and not want to take advantage of them.”

The above-mentioned SmartMoney article gives some impressive numbers on how much homeowners can save just by refinancing. The example was given that if a borrower took out a $400,000 mortgage at this same time last year, the rate would have been around 4.75%. That same person could save over $200 per month by refinancing their mortgage right now, with the current rates almost a full 1% lower than in May 2011.

Over years, that 1% makes a huge difference and can save thousands of dollars. As an example, the article highlights a money manager who secured a 5.25% interest rate in 2010, when he first refinanced his Houston home. Given the lower rates this year, Lance Roberts is in the process of refinancing to a loan 1.25% lower than his previous one.

The monthly and yearly averages of 30-year fixed-rate mortgages can be found on Freddie Mac’s website. Data goes as far back as 1972. Looking at the past 5 years, it is quite easy to see the rates plummet, bottoming out this year.

In 2007, the average for the year for a 30-year fixed-rate mortgage was 6.34%.

In 2008, it was 6.03% and in 2009, 5.04%. The rate dipped even lower, to 4.69% for an overall average in 2010, and lower to 4.45% in 2011.

If you took the average for the first four months of 2012, the average rate so far for this year is just 3.92%. Looking back at the oldest data on the site, 40 years ago, in 1972, the rate was 7.38% as a yearly average. There isn’t even data old enough on the Freddie Mac site to get within 3% of what the incredibly low rate is in our current year.

1. Repair your credit. Pull a copy of your credit report before beginning the refinancing process. "You want to give yourself ample time to clear up any mistakes and put your best foot forward in the qualification process," says Greg McBride, a senior financial analyst at Bankrate.com. Borrowers with good credit scores of 740 or more generally get the best rates, he says.
Low-income borrowers aren't the only ones who can run into credit problems. "Someone with a higher score who misses a payment could take a bigger hit than someone with a lower score, because there's further to fall when they stumble," says Anthony Sprauve, a spokesman for Fair Isaac (FICO: 39.99, -0.22, -0.55%), creator of the FICO credit score. Borrowers who have elected not to use much credit can wind up with a low credit score.
Under the Fair Credit Reporting Act, borrowers are entitled to one free credit report from each of the three main credit bureaus -- Equifax (EFX: 45.15, -0.08, -0.18%), Experian and TransUnion -- every 12 months. You can request a free credit report at AnnualCreditReport.com or by calling 877-322-8228.

2. Shorten the loan term. If you are several years into your mortgage, you can maximize your savings by opting for a new loan with a shorter term.
Consider a borrower who took out a $200,000 30-year fixed-rate mortgage with a 5% rate in 2009. Refinancing into a 30-year fixed-rate mortgage with a 3.875% rate would lower monthly payments by $177 to $897, according to HSH.com, and provide about $25,000 in savings over the life of the mortgage.

Shift to a 25-year mortgage with the same rate and the payment falls by about $100 less, to $993, but the savings over the life of the loan jump to nearly $50,000. With many borrowers seeking to pare debt, a growing number of lenders now offer mortgages with terms of 25, 20, 15 and even 10 years.

3. Contact many different lenders. Rates are at historical lows, but the gap between the best and worst deals can be as much as a full percentage point, according to HSH.com. With pipelines near capacity, some large lenders have been raising rates in an effort to hold down volume while boosting profits.
Loan costs can vary substantially. When Bankrate.com surveyed lenders last year, "origination fees," which compensate the lender or broker for arranging the loan, ranged from a low of $123 to more than $2,000 on a $200,000 loan, depending on the lender. Getting estimates from multiple lenders can give you ammunition to negotiate a better deal, says Mr. McBride of Bankrate.com.

Even in an era of tight credit, standards vary. Borrowers with good credit scores, who have been on the job for at least two years and aren't self-employed, and have at least 20% equity are likely to have the easiest time refinancing, says David Zugheri, co-founder of Envoy Mortgage.

Meanwhile, those with weak credit and reduced incomes face substantial hurdles.
Jason Russell, a San Francisco mortgage broker, says he approached five lenders before finding one that would refinance one of his clients, a partner in a law firm who had solid finances but couldn't show two years of self-employment income because his firm recently had been acquired.

4. Relationships can make the difference. Banks remain cautious about mortgage lending, but some show more flexibility to their better customers. Daniel Goldstine, a psychologist who lives in Berkeley, Calif., says several lenders refused to refinance his $1 million mortgage, even though he has good credit, substantial assets and his home was appraised for about $5 million. Mr. Goldstine says he was able to secure a refinance through Citigroup after making a large deposit there.

"Sometimes we will ask customers to bring additional assets to the bank," says CitiMortgage president Sanjiv Das, who declined to discuss specific customers. "Then we know you have the ability to pay based on your assets."

Bank of America is offering more underwriting flexibility to certain customers who have at least $250,000 in assets with the bank or its Merrill Lynch or U.S. Trust units. For instance, a borrower with a company car might be allowed to provide three months of documentation showing that the employer is picking up the expense, instead of 12 months, as is standard.
J.P. Morgan has "slightly higher" loan-to-value cutoffs thresholds for its deposit and investment customers, a bank spokeswoman says.
Community banks and credit unions can also be more understanding. "It's much easier to deal with customers on a holistic basis," says Noah Wilcox, chief executive of Grand Rapids State Bank in Grand Rapids, Minn. "It's easier to manage the risk."

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any information provided does not constitute an offer or a solicitation to lend. Providing information to purchase does not guarantee a loan approval. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.

First Capital Mortgage is a subsidiary of PHH Home Loans LLC, a direct lender, Dept. of Corporations file #413-0713 NMLS#4256

Visit First Capital Online or call: 310-458-0010