Refinancing Guidelines

Refinancing a mortgage may or may not be a good move for a homeowner, regardless of how low interest rates get. Some homeowners who factor in refinancing fees, penalties and their credit ratings find that a refinanced mortgage wouldn't be a better deal than the loan they already have.

Benefits

• Refinancing a mortgage can be a time-consuming and expensive process, so determine whether undertaking the process would significantly benefit you. Useful benefits include refinancing for a lower interest rate, which would reduce your monthly mortgage payment and the total cost of your mortgage over the life of the loan. Switching from an adjustable-rate mortgage (ARM) with fluctuating interest rates to a fixed-rate mortgage also can be beneficial, especially if your income has dropped since you first got the loan. An ARM puts you at risk of having your interest rates rise to a point where your mortgage payments become unaffordable.

Considerations

• Consider your eligibility for getting better loan terms with a refinanced mortgage. Significant credit problems, large amounts of debt, late mortgage payments or an unverifiable income can prevent borrowers from getting loans with good terms and low interest rates. The loan-to-value ratio for your home also will be a factor. A lender will consider the amount of money requested for a refinanced mortgage and compare it with the appraised value of the home to determine the ratio. It will need to meet guidelines established by the lender to get the best loan terms.

Expenses

• Discuss all refinancing fees with a lender to determine if you're prepared to pay them. Refinancing fees vary, but the U.S. Federal Reserve Board website notes that appraisal fees can cost as much as $700. Fees paid to a lawyer or company to process the documents for closing the loan can add another $1000 to your refinancing costs. You also should find out whether your current mortgage includes prepayment penalties, which are fees charged for paying off the loan early. Such penalties can be enforced even when homeowners refinance their mortgages.

Documentation

• Be prepared to prove you can repay a refinanced mortgage. Most lenders will want to see documents verifying your income and assets, including bank statements, investment documents and tax returns. Self-employed homeowners may need to provide a lender with a profit-and-loss statement from their business.

Expert Insight

• Home appraisals can be problematic when there's a downturn in the housing market and home values are dropping and foreclosures are rising. In such cases, appraisers may have to use abandoned or foreclosed properties in an area to assess home values. That ultimately drags down the assessed values of all properties in the area and makes it more difficult for homeowners to get approval for refinancing.