Refinance? Firtst, see whether you will save

When mortgage rates fell below 5 percent last month, broker Jeff Perdue's phone lines lighted up as dozens of people tried to join the latest refinance boom. When the ringing stopped, only five were approved.

The rest had good credit, good income and "decent equity" in their homes, but that wasn't enough, said Perdue, owner of Orlando Home Mortgage.

"The value of their homes killed the deal," he said. "I had to call them and tell them, 'I'm sorry. If your house had been worth what it was when you bought it, this would have been a piece of cake. Now the numbers don't make sense for you.' "

Perdue's story is a cautionary tale for many who hope to refinance their mortgages and take advantage of some of the lowest rates in history. For the lucky ones, refinancing can wipe way thousands of dollars a year in mortgage payments -- a bright spot in an otherwise dim economic picture.

But if Perdue's report is any indication, the approval rate may be fractional in this re-fi "boomlet."

"It's not such a bright spot if you're upside down in your mortgage," said Philip van Doorn, analyst for TheStreet.com Ratings. "Some will indeed benefit from the low rates, but not as many as you'd think."

There is no surefire formula to determine whether you should refinance. First of all, focus on your potential savings, not whether your new rate will be a point or two lower than your current one.

Divide the total cost of the loan by the monthly savings from refinancing. That gives you a break-even point: the number of months before it pays off. You should live in the house at least that long for it to be worthwhile.

Beyond that, it gets more complicated. What is your credit score, and what interest rate will it fetch? What are your closing costs? Have you shopped around for the best deal? What is your home's appraised value and subsequent loan-to-value ratio? That last item alone that can scuttle refinancing these days even if other planets are aligned.

If the refinanced loan amount is more than 80 percent of the home's value, borrowers must pay a mortgage-insurance premium, which can dramatically reduce any savings. If it goes over 90 percent, you would have to bring money to the table, which could make the deal cost-prohibitive.

Plummeting housing prices will turn many homeowners into bystanders in this refinancing wave.

"Many who don't have much or any equity are not invited to the refinance party," said Greg McBride, senior financial analyst for Bankrate.com.

However, if you are among those who are in good shape with your home equity, credit score and debt level, you have a nearly unprecedented opportunity to lock in the best rates in more than four decades.

"These must be considered the lowest rates we might see in our lifetime, and they are unlikely to stay this way," said Jason Chepenik, a financial planner and managing partner of Chepenik Financial in Orlando. "If you do qualify, you should consider paying the extra point or so to buy your 30-year mortgage rate to the low 4-percent range."

Even if you are creditworthy, however, don't expect easy credit this time around.

"Only good borrowers need apply," said Andrew Orr, a financial planner with OrrGroup Financial. "We are back to the 1950s, so to speak, when people wanted a home for shelter, not for an investment. So, it's actually a good situation now, even though it makes it difficult for people to get a mortgage."

Richard Burnett can be reached at rburnett@orlandosentinel.com or 407-420-5256.

By:
Richard Burnett Sentinel Staff Writer

Source:

 It is a good tip for everyone that before considering refinancing
one should focus on potential savings.