Should You Apply for Mortgage Refinancing?
05/07/09
The past month has seen a significant rise in mortgage refinancing applications. Rates offered on the average fixed rate mortgage were at the lowest point in decades. Some consumers are taking a chance to see if the interest rates will be lowered more in the coming months, as others are not taking a risk and applying for mortgage refinancing now. Even if the interest rates are low and you wish to undergo mortgage refinancing, it is important to examine your personal financial situation before you apply. Lenders are requiring much more of their borrowers now. One of the factors that led to the current woes in the housing market was the slack standards many banks had regarding home loans. As a result of the credit crises and decline of the real estate market, lenders have significantly tightened their lending standards. They are requiring higher down payments on new loans and higher equity for mortgage refinancing. And credit scores of applicants must be excellent to be approved. This all translates to fewer approvals for mortgage refinancing, in spite of the significant rise in number of applicants.
Deciding if mortgage refinancing with the current low rates makes sense for you can be confusing. The most important thing to note is if your home is now valued at less than you owe on your mortgage. Some homeowners in areas hardest hit by plummeting values are in this situation. You will not be approved for mortgage refinancing if your current mortgage is higher than the value of your home. In fact, many lenders offering mortgage refinancing now make 20 percent equity requisite. If you have enough equity in your property to apply for mortgage refinancing, then it is time to work the costs and benefits.
First, subtract the estimated monthly mortgage payment with the new interest rate from your current monthly payment. Then work out what the total cost of the mortgage refinancing will be. You will have to pay for a new appraisal and title, lawyer fees, filing fees and any penalties (if applicable) for paying off your original mortgage early. You will need to know how long you plan to own the house for the final calculation. Take the total cost of the mortgage refinancing and divide by the estimated monthly savings. This is referred to as the "break even point," or how long it will take for you to begin to save on your monthly payments as a result of the mortgage refinancing. It probably is not wise to undergo mortgage refinancing if that number is larger than the number of months you anticipate owning the house. If your break even point is less than the time you expect to own the property, then it is wise to consider mortgage refinancing.
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