Should I Refinance My Mortgage?

Common Questions About The Right Time To Refinance

Q: We’ve been waiting to refinance because we felt like mortgage interest rates would go lower. But now it looks like interest rates have bottomed out and so we’ve decided to move ahead.

But at the same time, the value of our neighborhood appears to be falling. With local home values having fallen so dramatically, it seems like we’re right on the borderline of having 20 percent in equity. In fact, the amount we owe on our mortgage might be more than 80 percent of the home’s value. It’s borderline.

Do we risk paying $400 or so for an appraisal that might show us we can’t refinance?

Also, everything I read says not to refinance if you’re going to move within five years. We might move within five years. In fact, we talk about moving all the time. But one quote I got from a mortgage broker showed us that even with rolling the closing costs into a new 25-year loan, we’d still come out with a lower monthly payment than what we have now.

So does that conventional wisdom still apply? Is there something I’m missing or should we just go ahead and refinance even if we move in a year?

Finally, where is the best place to shop for loans? Should we go with a mortgage broker or call around? I’m getting nowhere with our current big box lender.

A: You’ve asked some excellent questions that I am sure many of your fellow homeowners are thinking about as well. Let’s start at the top.

While interest rates appear to have bottomed out, they could stay at these near-historic low levels for quite some time. (It’s my feeling that when 30-year fixed-rate mortgages are available at 4.5 percent or less, it’s a sign of how weak our national and world economies are.)

But you’re facing an even bigger problem which is falling home values. The latest figures seem to show that home values are again declining after rising slightly this summer. If you’re barely at 20 percent equity in your property today, depending on where you live, it’s possible that your home equity will shrink further before you can close on your refinance.

That brings up another issue: If you don’t have at least 20 percent equity in your home, you’ll have to pay a higher interest rate for your loan or pay for private mortgage insurance (PMI), which is expensive these days, and that additional cost could easily wipe out any savings you would garner from refinancing.

Should you pay $400 for an appraisal? Probably not.

You’re better off starting the refinance process and having the lender order the appraisal. If you order an appraisal separately, there is no assurance that the lender you end up choosing will end up with the same appraised value. Your appraisal won’t be able to be used by that lender and you’ll be out the money for the appraisal. If your bank sends out an appraiser and the property fails to appraise at a high enough price for you to refinance, you should make sure that you only lose the cost of the appraisal if you decide not to move forward with the refinance.

As far as deciding when to refinance if you’re going to move, I think if you can save money from the get-go and pay off the costs of refinance within a relatively short period of time (say, six to eight months), there’s no reason not to refinance.

Having said that, if you are paying closing costs and those costs are rolled into the amount you will owe on the mortgage, you may not be getting a great deal even if your monthly payment to the lender goes down. If you sell within one year of refinancing, you’ll have to repay all of those closing costs. So, you need to make sure the savings on your monthly payment are sufficiently high to counter any closing costs.

Finally, you should shop for loans at a variety of different lenders, including a big box lender (not yours, but another one), a credit union (if you belong to one or can join one), a mortgage broker, a small local bank and perhaps online. You can get a sense of interest rates and where they stand locally at