Terry Savage of the Sun-Times just had a great article on the ins and outs of refinancing. Rates are at record lows, but what's the criteria?

To refinance your mortgage, you need to meet three basic criteria:

Good credit -- If your credit score has dropped below 720, you might be turned down for a loan -- or you could be forced to pay a higher rate. Your lender should check your credit score at no cost, or you can pay $15.95 at www.myFICO.com.

Equity in your home -- Falling home prices could have wiped out your initial down payment or any home equity. Before you pay for an appraisal or application fee, make sure your lender runs a free "automated valuations model" on your property, checking comparable properties in your neighborhood. Then, pay for an appraisal if your lender is reasonably confident that you have at least 20 percent equity in your home to qualify for the refi.

Income -- Even if you have good credit and equity in your home, you still might not qualify if you or your spouse is unemployed. Just keeping current on all your bills to maintain your credit rating isn't enough. You'll have to prove your earnings history for the past two years.

Most people blindly refinance into another 30-year, fixed-rate mortgage. You can use the calculators at Bankrate.com to see how much you'll save on monthly payments at lower rates.

If you're younger, still working and need the break on monthly payments, then stick with that 30-year deal. But if you've been paying on your existing loan for a while and are getting closer to retirement, you might want to consider a 15-year loan. The rate will be about a half a percent less than on a 30-year loan, but, because of the shorter pay-out time, a 15-year loan often doesn't lower your monthly payment, and it could even increase it. Still, you'll have the security of a fully paid home when you retire. Or you can always take the 30-year loan and make extra principal payments every month.

No matter what the term of the loan, make sure that it's a fixed rate. Don't fall for any adjustable-rate loans -- even with a very low interest rate -- because those will have to be refinanced again down the road. If all this money-creation leads to inflation in the future, rates will move much higher. If instead, rates move even lower, you can always refinance again.

It's not just the quoted mortgage rate you want to consider. It's the annual percentage rate, or APR, that takes fees and costs into consideration. For example, a lender might quote a mortgage rate but then charge additional "points" (each point is 1 percent of the loan amount) and fees for arranging the deal. So focus on the APR, which takes those costs into account. The quoted rate and the APR should be within a quarter point.

Also, be aware that if your loan is a jumbo loan (above the $417,000 limit for loans insured by Fannie Mae and Freddie Mac), you will likely pay a higher rate.

And be sure to ask about the total monthly payment. You might be required to put property taxes and insurance costs into escrow as part of the deal, which could increase your monthly bill.

There are two ways to get a mortgage -- directly from the lender or through a mortgage broker. Either way, you'll have to supply a lot of documents to prove your income and submit to extensive credit checks, as well as an appraisal of the property.

Then, after this process called "underwriting," you'll be given a "lock" on a rate for probably no longer than 30 days, during which you have to close on the deal. (If rates drop further after you lock in a rate, some lenders offer the option to "float-down" for free.)

Online matching services, such as QuickenLoans.com and LendingTree.com, allow lenders to compete for your loan deal. But you'll have to sort through those that contact you with offers.

To find a mortgage broker, you can use GuaranteedRate.com or AmericanStreet.com, or you can Google mortgage lenders in your area. But be sure to read the consumer reviews for that company on Yelp.com or Google, or check the Better Business Bureau. This is too important a transaction to trust to blind luck or rate advertisements.

 

The wave of foreclosures appears to be subsiding slightly. According to data from Mortgage Bankers Association’s National Delinquency Survey:

• The percentage of loans on which foreclosure action were started during the second quarter was 1.11 percent, down 12 basis points from last quarter and down 25 basis points from one year ago.

• The percentage of loans in the foreclosure process at the end of the second quarter was 4.57 percent, a decrease of six basis points from the first quarter of 2010, but an increase of 27 basis points from one year ago.

• Loans that were 90 days or more past due or in the process of foreclosure was 9.11 percent, a decrease of 43 basis points from first quarter, but an increase of 114 basis points compared to the second quarter of last year.

“The good news is that foreclosure starts are down, and the inventory of homes anywhere in the process of foreclosure fell for the first time since 2006 and had the largest drop since 2005,” says Jay Brinkmann, MBA’s chief economist.

The bad news is that the percent of loans one payment behind had peaked in the first quarter of 2009 at 3.77 percent and fell to 3.31 percent by the end of 2009. Now that rate has risen to 3.51 percent.

“Only when we see a consistent increase in employment will we see an increase in sales and starts, and a sustained improvement in the delinquency numbers,” Brinkmann adds.

Source: Mortgage Bankers Association (08/26/2010)