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
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
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
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
"You have to have a taste for doing paperwork," said
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
Bousbib, for example, took a no-cost refinance with Equity Now, a
Lowering the monthly payment is not the only reason people are refinancing. Many are shifting from a 30-year loan to shorter terms, said
"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
Nielsen, for example, recently talked to a customer with a
"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
"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.' "
"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
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,
If you refinance to a 4 percent rate, with monthly payments of
Or maybe your priority is paying off the mortgage faster. If you have a 30-year,
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