Interest Rates Are Low, But Obstacles To Refining Still Too High For Many

HACKENSACK – As interest rates have slid over the past couple of years, Gabriel Bousbib of Englewood, Bergen County, refinanced his 15-year mortgage not once, but twice – cutting his interest rate in two steps from about 4.6 percent to 3.375 percent.

He's one of a number of homeowners who refinanced just a year or two ago, but decided it was worth considering again as mortgage rates hit record lows – now averaging around 4 percent for a 30-year loan.

"When you're quoting rates in the high 3s, people are saying, 'It's worth it to me,'" said Steve Hoogerhyde, executive vice president at Clifton Savings Bank.

Bousbib, a financial services executive, said the savings will add up over the life of the mortgage. "And if rates keep going down, I would refinance again."

Refinance applications have more than doubled over the past year, though they're not as high as in previous refinancing booms because it's harder to qualify in the current atmosphere of tighter credit standards, according to the Mortgage Bankers Association. With the volume of home purchases still low, refinancing accounts for about 80 percent of recent activity.

Although the old guideline used to be that you should consider refinancing only when rates drop at least 2 percentage points, the new wisdom is that it can be worthwhile even with smaller drops.

"For most people, if you can shave three-quarters of a percentage point off your interest rate, it's worth looking at," said Greg McBride, an analyst with Bankrate.com, a personal finance website.

For homeowners who plan to stick with the same loan term and want to lower their monthly payments, the math is straightforward. Find out how much it will cost to refinance, figure out how much you'll save each month and then how long it will take to break even. If you can save enough to offset the refinancing costs within a year or two – or even longer if you expect to stay in the house for a number of years – it's worth considering.

Though low-interest rates are eye-poppingly low, the refinancing climate has changed from the easy-money days of five years ago. Generally, to get the best rates, homeowners need a 740 FICO credit score, well above the median score of 711. They also usually need at least 10 to 20 percent equity in the property. A recent expansion in the federal Home Affordable Refinance Program should allow refinancing this year by more so-called underwater borrowers – those who owe more than their homes are worth.

Lenders are also demanding much more documentation – including pay stubs, tax returns and bank statements – than they did five years ago, at the insistence of government regulators as well as Fannie Mae and Freddie Mac, which buy mortgages from lenders.

"You have to have a taste for doing paperwork," said Keith Gumbinger of HSH Associates, a Pequannock Township, Morris County, company that tracks mortgage data. "You're going to be asked for lots of documents. No one loves the process to begin with, and in today's environment, it's even less palatable."

These stricter requirements are simply a return to the kind of underwriting standards that prevailed before lending standards slackened a few years back, leading to the housing bust and foreclosure crisis, McBride said.

"We're in this mess because money was too easy to get," he said.

Refinancing costs roughly $3,000, according to several mortgage companies. That covers costs such as an appraisal, title insurance, application fees, attorney's fees and recording the mortgage. Some lenders also offer low- or no-cost options, which they can do by either adding the closing costs to the mortgage amount or charging a slightly higher interest rate.

Bousbib, for example, took a no-cost refinance with Equity Now, a New York-based lender that also lends in New Jersey. "It didn't cost me a penny," he said. Equity Now says it charges a slightly higher interest rate on no-cost loans.

Lowering the monthly payment is not the only reason people are refinancing. Many are shifting from a 30-year loan to shorter terms, said Matthew Gratalo of Real Estate Mortgage Network in River Edge, Bergen County. He has worked with clients in their 40s who hate the thought of carrying a mortgage into retirement.

"They're looking ahead and saying, 'I don't want to pay a mortgage forever; can I get this done in 15 years? Can I be done with this and have it paid off?' " Gratalo said.

"Certainly shortening the term makes a lot of sense because you can cut years of mortgage payments," said Carl Nielsen of Mortgage Master Inc.'s Wayne office.

Nielsen, for example, recently talked to a customer with a $375,000, 30-year mortgage at 4.5 percent. The customer is considering a 20-year mortgage at 3.75 percent. His monthly payments would go from $1,900 to about $2,223, but by shortening the life of the loan, he'll save more than $150,000 in interest payments.

"That's kind of a no-brainer," said Nielsen.

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And many homeowners are refinancing from an adjustable-rate mortgage to a fixed, so they don't have to worry that their monthly payments will rise, McBride said.

"You're not necessarily going to generate savings in your monthly payments, but you're going to insulate yourself from future payment increases," he said.

But one motivation for refinancing has become much less popular. These days, fewer homeowners are refinancing their homes to get cash for other purposes, as they commonly did during the housing boom.

"Everyone's perception was they were house-rich," said Gratalo. "Money was very easy to get. The pattern I saw was that people would think, 'My house is worth $200,000 more; why not take out $20,000 to pay off credit card debt?' They'd come back a year later, they've used up all that money, and they'd refinance again. They thought, 'We have this huge asset, we should be able to spend some of it.'

"Now, everyone knows houses are not appreciating," he continued. "If anything, they're depreciating. They know they're not sitting on a piggy bank any more. They think, 'We have to start paying down our debts instead of living like we have this asset.' "

Michael Moskowitz of Equity Now agrees.

"People are very cautious about taking out equity," he said. "In the old days it was, 'Redo the kitchen and go on vacation.' You don't hear that kind of thinking anymore."

And even if they wanted to take money out of their homes, many homeowners can't.

"If you bought your house in the last seven years, unless you put a ton of money down, you don't have the equity in your house" to borrow against, said Steve Grossman of New Jersey Lenders Corp. in Little Falls, N.J.

Thinking about refinancing?

•Do the math. See how much refinancing costs, then check how much you'd save on monthly payments to figure how long it would take to break even.

•Check your credit reports at AnnualCreditReport.com and correct any errors.

•Comparison-shop among several lenders.

For example: You have a 30-year, $300,000 mortgage at a 5.5 percent interest rate, and your monthly mortgage payments are $1,703.

If you refinance to a 4 percent rate, with monthly payments of $1,449, you'll save $254 a month. If your refinancing costs $3,000, you can break even in a year.

Or maybe your priority is paying off the mortgage faster. If you have a 30-year, $300,000 mortgage at 5.5 percent, you will pay more than $300,000 in interest over the life of the loan. Refinance into a 15-year loan at 3.5 percent, and your monthly payments will rise to $2,145. But you will pay only $86,000 in interest over the life of the loan.