Refinancing in the Current Housing Market

You've heard the terms "refinance" and "foreclosure" in numerous news stories and reports, but what exactly is going on? Due to economic downturn and rising foreclosures, the Federal Reserve stepped in, offering to spend at least $500 billion dollars to infuse cash into the mortgage market. As a result, home loan rates have, in some cases, dropped below 5%.

Many homeowners are trying to capitalize on these low rates by refinancing their mortgages. And, while that can certainly translate to considerable savings in the long term, the refinancing boom has both positives and negatives. Find out what they mean for you.

The Upside:
The rate of refinancing has nearly quintupled in some cities, as homeowners seek to lock in historically low interest rates. The recent economic issues surrounding the mortgage industry have also led people to investigate their options more carefully. Most homeowners are opting for traditional fixed-rate mortgages over controversial, less conventional loans. Also, almost a third of them are switching to 15-year mortgages in order to pay off their homes more quickly. Plus, spending less money on a mortgage can free up finances to cover other bills and may help minimize debt faster.

The Downside:
While it’s easy to get excited about such low interest rates, there are several drawbacks to the refinancing boom. Primarily, declining home values may leave many homeowners shocked at the appraisal values of their home. Worse, some even find out that they owe more on their old loans than their house’s current value. That fact, combined with tougher credit standards, leaves many homeowners ineligible to refinance. Refinancing also requires closing costs to be paid up front — something many homeowners may not be able to afford in this economy. If a homeowner chooses to finance these costs, their monthly loan payment and overall loan amount will increase. Additionally, the low interest rates are not encouraging new homeowners to enter the depressed real estate market, and foreclosure rates remain high.

What It Means For You:
There’s no simple answer when it comes to refinancing. However, it’s important to know where you stand in order to make an informed decision regarding your mortgage. Knowing your credit history and FICO^® Score may be able to help you negotiate with lenders whose standards are far tighter than before. Even if you have less-than-perfect credit, understanding your credit history, disputing inaccuracies in your credit report, and taking care of your credit health can help put you in a better position — and emerge from this turbulent economic time aware of your credit and its importance.

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This Month’s Poll Question:

Given today’s refinancing boom, we would like to know if you’ve recently refinanced your home. Check back next month to see how you stand compared to other newsletter readers.

Interactive Tool: Refinance Interest Savings

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Did You Know?: Six Pitfalls to Avoid When Buying a House

If you’re looking to buy a home, there are certain precautions you’ll want to take to help minimize your risks. Here are some tips to make your buying experience a more positive one:

1. Know what you’re paying for up front. Throughout the mortgage lending process, you’ll be faced with a list of fees. From origination and escrow fees to title insurance and property taxes, some may seem inflated while others fall in line with your expectations. You should always question a fee you are uncertain about.
2. Try to avoid an early pre-payment penalty. Everyone wants to have the flexibility of paying off their 30- or 40-year mortgage early or refinancing when rates go down. The reward is not only owning your house outright but saving on interest charges. Work with a lender who’s willing to waive any pre-payment penalties or can offer you the ability to refinance your mortgage at a better rate.
3. Watch out for the classic bait-and-switch. A lender may try to reel you in with low interest rates, no money down, or no closing costs, only to inform you that your credit score is too low for these offers. These schemes ultimately end up costing you more money. Avoid this situation by finding out your FICO Score beforehand. And, if you feel you are not getting the best rate and loan options, look for a lender you feel more comfortable with.
4. Don’t let real estate agents pressure you to buy. It’s hard to remember when you’ve looked at countless houses that homebuying is a time-consuming process, and you should take all of the time you need. Your agent would rather see you take the time to find the perfect home for you than see you make a rushed decision. Also, your real estate agent works for you and has a fiduciary responsibility to protect your best interests. Always comparison shop for the best rates and programs.
5. Buy only what you can afford. Stay within your debt-to-income ratios, and this can help prevent you from over-extending your debt. Use the affordability calculator to determine the minimum and maximum amount you can afford before going house hunting and stick with your estimate.
6. Never buy a home on impulse. At some point during your search for a home, you may decide to settle for less or get caught up in a bidding war for a house you don’t necessarily want to buy. Staying within your budget can be a real challenge, especially if a lender approves you for a higher loan amount than you feel comfortable with. Give yourself time to think about your options, and walk away if you feel it is a questionable deal and see how you feel about it the next day.

For help finding competitive interest rates for you, try the Equifax Rate Finder: http://learn.equifax.com/banking-loans/

© Copyright 2009, Informa Research Services, Inc. ("Informa"). While all attempts have been made to provide effective, verifiable information in this article, neither the author nor Informa assumes any responsibility for errors, inaccuracies, or omissions. You should always seek the guidance of a licensed professional before making any major financial decisions.