Time to Refinance? Here’s How to Decide…

By Lee Bellinger / November 12, 2013

As a rule of thumb, you should generally not refinance into a new loan unless you can lower your rate by one half or even a full percentage point and you plan to own the property for several years.
That’s because there are costs (not to mention hassles) associated with refinancing a house. Depending on factors including the rate, duration, and balance of your existing mortgage, the number of years you expect to continue living in your home, and your tax situation, the fees may not justify the realized rate improvement.

A Good Credit Score
May No Longer Get You a Great Mortgage

Meanwhile, just because currently the rates are lower does not mean you can obtain them – or that it will be easier to qualify for the loan in the first place.
For example, if your home value has dropped such that you now owe more than 75% or 80% of the present market value (appraisers don’t fudge values like they did several years ago either, by the way), expect to pay a higher interest rate unless you pay down some of the debt in the process of refinancing. This is particularly the case if you have an existing second mortgage on the home.
And many banks now won’t offer their best interest rates unless your credit score is 760 or higher, a level achieved by barely 25% of borrowers. The severe recession of the past few years has taken a toll on the average borrower’s credit score, and lenders have raised their lending standards at the same time.
Probably two or three years ago, a 720 was a pretty good score,” said Steve Ely, president of North American Personal Solutions at Equifax, which is also one of the three major consumer reporting agencies. “Today’s 760 is what a 720 used to be.
A tool that can help you determine whether it’s to your financial advantage to refinance is the National Bureau of Economic Research’s Refinance Calculator (zwicke.nber.org/refinance). A team of economists at NBER (a private, nonprofit organization) developed the Refinance Calculator to take into account important realities most mortgage calculators on the Internet don’t, including tax rates and inflation.

How to Find the Very Best Deals:
Smaller Banks May Have the Best Rates

But by all means explore refinancing into lower rates right now – under optimal conditions, a 30-year fixed rate mortgage can be had at less than 4.4%. Fifteen year mortgages are under 3.9%. And five-year adjustable rate mortgages (ARMs) – not recommended unless you plan to sell the house within the next few years – can now be had for less than 3%!
As for getting the absolute lowest rates on a mortgage, the biggest, best-known lenders probably aren’t the place to find them. According to the industry periodical Inside Mortgage Finance, relatively small-sized banks are increasingly offering better terms than giant mega banks.
In addition to looking at small banks for ultra-low mortgage rates, shop Internet-linked lenders (which you can find through sites such as LendingTree.com) and credit unions. Alternatively, consider going through a mortgage broker who can tap his contacts for the best available deals.
One final caveat: Be aware that a refinanced mortgage usually becomes what’s known as a “full-recourse loan.” So if you default after refinancing, your lender can come after all of your assets, not just the home itself.