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Refinancing as a Savings Tool

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By Susan Tompor

(MCT)—Many homeowners are feeling a tad richer after refinancing — some again and again — thanks to the Fed’s never-ending efforts to drive down interest rates.

Call it the Re-Fi Re-Do.

Some homeowners nationwide are in the unusual spot of refinancing a couple of times in the past couple of years. And the saga could continue in the months ahead, after the Federal Reserve’s extra efforts to keep mortgage rates low.

“It makes all the sense in the world,” says Greg McBride, a senior financial analyst.

Some borrowers can save money when they spot a rate that’s at least half a percentage point lower than their existing rate, experts say. More typically, people tend to move when they see more than a full percentage point drop.

Robert Traviss, 48, refinanced in September — the second time in four years — and saved roughly $150 a month.

Traviss, who lives in Monroe, Mich., and works at a utility company, says he and his wife started with a rate around 8 percent in 1999, refinanced to about 6 percent in 2008, refinanced again in September and now have a rate at 3.75 percent.

The couple, who owe $112,000 on their mortgage, pay extra each month so they’re not just refinancing and dragging out the mortgage another 30 years.

“It’s kind of a no-brainer to save $200 when everybody’s hurting these days,” he says.

Take another example: Say a homeowner refinanced a $200,000 mortgage in January at a rate of 4.25 percent. If that homeowner now refinances to 3.7 percent, McBride says, he or she would save $63 a month. The monthly mortgage payment would drop to $920 from $983 a month.

To be sure, we’re not talking about the high-flying days of refinancing, when people grabbed thousands of extra dollars out of the house to pay for cars, trips or other goodies.

Data from mortgage giant Freddie Mac showed that in the second quarter of this year, 23 percent of homeowners who refinanced reduced their principal balance during the process and 59 percent maintained the same loan amount.

The percentage of borrowers keeping about the same loan amount was the highest in the 27 years of tracking.

Naomi Pennington, 69, who lives outside of Houston, didn’t want to tap into equity when she refinanced in September.

“Who would want to owe more money?” she asked. Instead, she refinanced to drop her rate by about 3 percentage points to 4.25 percent. She’s saving $300 a month on the payment. It’s her second refinance in five years.

These days, some homeowners who refinance even might bring extra money to the table to be able to pay a little more toward what they owe, says Joel Gurman, vice president of mortgage banking for Quicken Loans.

As people refinance for the second go-around in a few years, Gurman says, some may opt to go with a shorter-term mortgage, maybe 20 years or 15 years, to save money in the long term. Quicken has a product called Yourgage that has a customized term ranging from 8 years to 29 years.

Refinancing, of course, is a math problem. How much will it cost you to refinance to save “x” amount of dollars? How long will it take you to recoup the costs?

“Refinancing does have costs,” says Kathy Conley, housing specialist for GreenPath Debt Solutions, a nonprofit HUD-approved housing counseling agency.

It may not make sense for someone in their 80s to spend $4,000 upfront to save $50 a month, she says. Talking to a housing counselor in advance can help work out the numbers.

What Works, What Doesn’t, for Another Refinancing

—Some people who refinanced a year or two ago might not qualify for refinancing again.

Say both the husband and wife worked in 2010 but one retired or lost a job this year. If the debt-to-income ratio is now above 40 percent, that becomes a red flag for the lender, says McBride.

Some who recently became self-employed could face roadblocks, too.

—A homeowner needs a job or income. The refinance application could be turned down if you’re now out of work.

—A homeowner who owes far more than the house is worth is still not going to be able to refinance with a traditional mortgage. Their best bet would be the Home Affordable Refinance Program. But if you’ve already refinanced once under that program, you cannot refinance a second time.

Most experts say homeowners should start with their original lender to see about any streamlining options for that refinance. But it’s key to compare options at various lenders, too.

The good news is many homeowners have time to shop.

What You Need to Refinance:

—Find your pay stubs for the past 30 days or more.

—Get copies of your W-2 forms for the past two years. You may need copies of your 1040 federal tax returns if self-employed.

—Get a copy of your homeowner’s insurance policy.

—You may be required to bring in a cell phone bill to prove that you’re living at the home.

—Put together bank statements, 401(k) statements and brokerage statements for the past three months or so.

—Make sure to have copies of your most-recent mortgage statement.

—Some lenders offer zero-point mortgages, which typically would have a slightly higher rate but not large upfront costs. Other lenders may waive half or so of the closing costs.

—Before applying for any loan, get a free copy of your credit report at http://www.annualcreditreport.com. Make sure there are no mistakes on your report. Get copies of your credit report from all three credit bureaus.

—Remember, you get the best rates with the best credit scores. Before shopping for any loan, be extra careful about paying bills on time. Try to pay down debt.

—If you are refinancing, look into various programs, such as the revamped Home Affordable Refinance Program, or HARP. HARP 2.0 is for borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac. It applies to borrowers who have 20 percent or less equity in their homes. Call the Homeowner’s HOPE Hotline at 888-995-4673.

—Appraisals are generally required. But some programs don’t require an appraisal, such as some FHA loans or certain Fannie/Freddie HARP products.

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.

©2012 Detroit Free Press
Distributed by MCT Information Services

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