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Consumer
Refinancing surge has homeowners scrambling
WASHINGTON (9/26/11)--If you’re a homeowner thinking about refinancing to cash in on record-low interest rates, you’re in good company. Before you take the plunge, understand all your options, run the numbers, and avoid common blunders, because mistakes could cost you plenty (Kiplinger Sept. 15). In recent years, declining home values have forced homeowners to move from cash-out refis--where they pocketed large sums to pay for home improvements, cars, or luxury items--to cash-in mortgages. This means instead of receiving cash at settlement, they bring checks with them, particularly if they are underwater or facing higher rates on adjustable-rate mortgages, just to reduce the size of their mortgage. Or, they want to boost the equity in their homes to avoid paying private mortgage insurance. If you’re simply focused on making smaller monthly payments, you may be missing out. Many borrowers are switching to shorter terms, such as 15-year loans. Normally such a change would yield higher payments but, because of record low interest rates, the monthly payment may change only slightly. Compare monthly payments and total interest costs for 30-year, 20-year, 15-year, 12-year, and 10-year fixed options, if available. Because your home may be the biggest financial purchase you make, and refinancing at current rates could yield the biggest reduction in overall interest payments you’ll ever get, take time up front to get it right (Kiplinger Aug. 19):
* Clean up your credit. A credit score of 720 or more, plus 20% equity in your house, likely will get you the lowest interest rate available. * Shop for the best rate. Start at the credit union and ask about options and rates. Get good faith estimates to compare offers before you formally apply. * Gather plenty of documentation. You’ll likely need to provide recent pay stubs, two years of W-2s, proof of home insurance, two months of financial statements, and--if you’re self-employed--two years of tax returns.
Avoid common mistakes, identified by the LendingTree Marketplace Survey of Lenders (Dailyfinance.com Sept. 15). Don’t overestimate the value of your home or you’ll get higher-than-expected loan offers that an appraisal won’t support. Don’t assume rates are going to keep going down; if you wait too long before locking in and interest rates suddenly increase, you’ve lost out. And don’t focus only on interest rate. A shorter term, even with a slightly higher monthly payment, could save you tens of thousands of dollars in interest over the life of the loan. Remember that refinancing is not always in your best interest. Ask the lender to do a break-even calculation that shows how long you’d need to stay in your home to recoup closing costs and points. And if you don’t want to pay the closing costs to refinance, you could make extra principal payments on your existing mortgage. Ask the lender to calculate how much extra you’d need to add to the monthly payment of a 15-year loan to pay it off in 12 years, for example. For more information, read “Appraisers Home In on Value” in the Home & Family Finance Resource Center.


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