Refinancing Traps to Low Mortgage Rates

For three straight weeks mortgage rates jumped from their record lows, according to Freddie Mac. But is it a good time to refinance if you haven’t already caught the low rates? It really depends on what your financial situation and plans for your home are, so you can steer clear of refinancing traps, according to mortgage experts.

The rule of thumb is that if you can lower the rate on your home loan by one percentage point and you plan on staying in your home for at least three years this might be the time to do a refi. But that also depends on your employment situation and today that can run the gamete from fear of losing one’s job due to the weak economy to your company failing.

Refi Trap

More businesses have been forced to file bankruptcy in the last two years than since the late 1980s during the Savings and Loan Crisis and it looks like 2011 will be the next banner year. If there’s a good chance you’ll be selling your home and moving next year you may want to pass on refinancing.

Expense is a Consideration

Refinances aren’t cheap. Closing costs typically run 2% to 3% of the mortgage amount, and can run much higher depending on what state you are in and how much a title insurance policy and additional county and state recording taxes run. Call a title company to get a quote on just how much the fees will run before you run down to the corner banker or pick-up the phone to order a refinance.

You’ll also want to check to see if there’s a pre-payment penalty in effect on your current mortgage. Some home loans have extra fees attached to them if you refinance before a certain number of years. The penalties can be expensive and outdo any sort of savings you may reap by refinancing.

There are also a handful of other considerations before you decide to refinance. How much equity do you have in your home? Banks and mortgage companies are extremely conservative about refinancing mortgages in the current financial crisis but there is a special government program that will allow you to refinance up to 125% of your home’s current appraised value. Just be aware that the mortgage will be that much higher and that in this day and age with home prices coming down in the majority of the U.S. it’ll be many more years for you to possibly get to that higher value, if ever.

Got the Credit Score

Another major concern among homeowners these days is whether your FICO score is high enough. Lenders are very selective about what mortgages they’ll under-write today and reject far more loan applications than they accept, which is one of the leading reasons why the refinance market has slowed. You can usually get pre-qualified over the Internet to see whether you make the grade.

If you have already decided to refinance selecting the right mortgage for your home is a major consideration. Millions of people got caught up in purchasing new fangled home mortgage products like the Alt-A during the real estate boom with as many as five options and got burned by the banks for making the minimum payment. Fixed rate mortgages are usually the best option for most people with their near record low rates these days, but it depends where you stand with the rest of the criteria to get a loan in the first place.