When interest rates start to drop, financially savvy homeowners usually head straight for their banker or mortgage lender. They know the time may be ripe to refinance that higher interest rate fixed mortgage or renegotiate terms of an adjustable-rate mortgage.
But in the wake of the subprime meltdown and today's turbulent economy, it's gotten tougher to get what you want. Before approving refinancing, lenders are scrutinizing credit scores, the amount of equity that the homeowner has accrued, even employment and payment patterns.
What does this mean to you?
Plenty, if you're stuck with a high mortgage payment and a house that has taken a double-digit plunge in value over the past year.
If you put nothing down when you bought your house, made a small down payment, or have little equity, you may find it impossible to take advantage of lower interest rates.
If you have less than 5 percent equity in your home or a credit score below 680, you may not be able to qualify for refinancing or refinancing cash-out packages that in the past could have provided you with a lower mortgage rate and money over the value of your home to pay off credit cards, finance a major purchase, even pay for your child's education.
Even if you can find a lender willing to refinance your existing mortgage, a poor credit history and lack of equity could leave you facing additional fees and rates higher than what is offered to better credit risks. That could undermine any benefit derived from refinancing your mortgage now.
If you are in good financial shape, when does it make sense to seek refinancing?
When rates drop by one-half to one point, provided you stay in your home for at least five years to recoup the closing costs.
"In some cases, you may be able to do that in a year or two," says American Bankers Association spokesman John Hall. To really benefit, you need to keep your home long enough to pay the costs of the refinancing process, which can run several thousand dollars, depending on how much you borrow.
For a homeowner with an adjustable-rate mortgage and good credit, refinancing to a fixed-rate loan can guarantee that the interest rate will be fixed for the life of the loan. If you want to stick with an adjustable-rate mortgage, refinancing may let you negotiate for a better rate and payment cap than what you have now. By converting to a shorter-term loan, refinancing also can allow some homeowners to build up equity more quickly.
Mortgage experts offer these other suggestions: