(Money Magazine) — On paper it seems like the perfect time to refinance. The average rate on a 30-year fixed mortgage recently hit a 20-year low when it fell below 5% in mid-March. And the Fed has said that it will spend $300 billion to buy back government-backed Treasury bonds; that will probably keep loan rates low for months to come. But wade into the mortgage market, and you may quickly feel as if you’re trying to grab a dollar in a game-show booth where the money is blowing around: Those ultralow rates are right in front of you, yet maddeningly elusive.
Lenders, grappling with deadbeat homeowners and shifting regulations, have pared back on mortgage products and upped credit requirements. Still, you have a good incentive to try: If you took out a mortgage two years ago, when rates were in the mid-sixes, you stand to drop your rate nearly two percentage points, saving almost $300 a month on a $300,000 loan. Here’s how to navigate the roadblocks.
Figure out if you qualify. Nowadays, credit score, income and equity are king. To land the best rates, you’ll probably need a credit score of at least 740, a stable job, and 20% equity. “Banks are looking for reasons not to lend you money,” says Mark Miskiel of Lighthouse Mortgage in Sedona, Ariz.
If you don’t have 20% equity, a refi isn’t out of the question – President Obama’s housing package allows homeowners who owe as much as 105% to receive government-backed loans. To qualify for that program, however, your original mortgage must be held by one of the government-sponsored entities, Freddie Mac or Fannie Mae; you must prove that you can keep up with payments; and you’ll get stuck with fees that tack 0.25% to 3% onto your rate.
Get rid of the HELOC. Home-equity loans and lines have become the enemy of would-be refinancers. Before you can close on a new loan, your home-equity lender must agree to “subordinate” the secondary loan (meaning that your primary lender will get repaid first in the event you run into financial trouble). That can add up to a month in the process, says Bob Moulton of the Americana Mortgage Group in Manhasset, N.Y. One way to speed up the process is to do a consolidation refi. And know that lenders add up to 0.25% to your rate to cash out the secondary loan.
Unfortunately, if you need a jumbo loan (typically above the conforming loan limit of $417,000, and in some high-cost counties the limit is $729,750), you can kiss those super-low rates goodbye. While jumbos normally run about half a percentage point higher than smaller ones, today the spread is a point and a half.
Pay a point upfront. A point, which equals 1% of your mortgage amount, typically buys you an eighth to a quarter of a percentage point drop in your rate. Today some overloaded lenders are knocking half a percentage point off for those who pay a point, hoping this extra initial cost will deter serial refinancers. If you’re planning to stay put for about five years, it may be worth it. Conversely, consider adding an eighth of a percentage point to your rate to lock it in for 45 days. Banks and lenders are putting a lot more effort into vetting applications, so it can take up to two months to close a loan, vs. about 30 days in the past; you don’t want to risk rates’ moving against you while you wait. The payoff for patience: a loan you can live with, for a very long time.
Not so long ago, having a pulse qualified you to take out a mortgage. These days lenders are vetting applicants with the ardor of a Senate committee grilling an AIG executive.
Paul Wickstrom