Is Now the Right Time to Refinance?

If you’re in the market for a home, you couldn’t ask for a better scenario.  Since 2006, home prices have steadily fallen back to more normal levels, while at the same time interest rates on mortgages are near all-time lows.  This may be the best buying opportunity in real estate I will see in my lifetime, there’s only one problem: I already own a home.  Is there any way for me, an existing homeowner, to take advantage of the current market conditions?  Well, the answer is a definite maybe.

For many existing homeowners, falling housing prices is a double-edged sword.  Not only are we watching our net worth decline, but our loss of home equity makes it less likely that we will be able to take advantage of these exceptionally low interest rates through refinancing.  I recently inquired about a refinance and was pleasantly surprised by a few things I discovered:

Discovery #1 – If you have really good credit, you may qualify to borrow as much as 125% of the value of your home

I’m not suggesting that you do this, but 125% loans do exist, and that means even with the reduction in the amount of equity, if any, you have in your existing residence, you may still qualify to refinance.

Discovery #2 – If you are not paying PMI on your current mortgage, you may not necessarily have to pay PMI on your next mortgage

Typically borrowers must pay private mortgage insurance (PMI) when they borrow more than 80% of the value of a home, but thanks to a number of lending programs designed to stimulate home buying, you may qualify to refinance your existing mortgage, even if it’s more than 80% of the value of the home, without having to pay PMI.

Discovery #3 – Whether or not you are able to refinance will depend on who owns your mortgage, and which lender you talk to

I spoke to about a half dozen lenders, and some told me one thing, and some told me something else, but they all wanted to know if my current mortgage was owned by Fannie Mae or Freddie Mac.  In my case (and unbeknownst to me) my mortgage was owned by Freddie Mac, so at least according to some lenders that meant that I was able to qualify for a refinance for more than 80% loan to value without having to pay PMI.  There were a number of lenders that insisted that was not possible (needless to say I did not refinance with those lenders), so shop around.

In the end I did end up refinancing with my current lender, and as a result I will be able to pay off my mortgage in 15 years as opposed to the 26 years I had remaining on my previous loan.  I will have to pay an additional $200 a month, but I’ll save over $120,000 by the time it is all said and done.

Just because rates are low doesn’t mean you should refinance.  Refinancing comes at a price, and there are a number of factors you should consider first.  In some cases, you would be better off simply making an extra payment every month on your current mortgage, so do the math before you agree to pay thousands of dollars just to lower your rate.

And finally, the best terms are usually available only to those with exceptional credit, so if your credit is less than perfect, work on cleaning it up before you start making calls.  Lenders will bend over backwards to refinance your loan, but only YOU can decide if it’s really worth it.

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