It's Still a Good Time to Refinance - If You Qualify

With mortgage rates still near record lows, it makes sense for many homeowners to think about refinancing. Know what to consider, run the numbers, but don't expect to get the best rates unless your credit is squeaky clean (Bankrate.com Feb. 5).

Interest rates on 30-year fixed-rate mortgages fell to an average of 4.89% for the week ending Jan. 9 (U.S. News & World Report Jan. 23). Despite a slight upturn in rates in recent weeks, homeowners' interest in refinancing remains strong. But don't expect an instant "yes"--about half of applications are rejected because of mediocre credit scores, insufficient home equity, or negative equity (owing more on the mortgage than the property is worth).

Here's what you need to get the best rates:

• Keep your FICO score above 740. A score of 720--previously considered excellent--just isn't good enough anymore to get the best rates. About a third of your score reflects whether you pay your bills on time.
• Have equity in your home. Just to qualify for refinancing, you may need a minimum of 3% equity. You'll need a higher percentage to get the best rates. Seattle-based Zillow (Feb. 2) estimates that one of six American homeowners are underwater, meaning they have negative equity.

Before you refinance, do your homework:

• Calculate your breakeven point. This represents how soon you will recapture the cost of refinancing through lower monthly payments. If the cost to refinance is $2,125 and your monthly savings is $125, your breakeven point is 17 months (2,125 divided by 125).
• Ask about fees. If you're paying $4,000 in fees to slash monthly payments by $100, refinancing doesn't make sense if you plan to sell in three years.
• Opt for a fixed-rate instead of an adjustable-rate mortgage (ARM). Despite a slightly lower rate on ARMs, the differential isn't worth the higher risk of an ARM.
• Consider job stability. Switching from a 30-year to a 15-year fixed-rate mortgage lowers the total interest paid over the life of the loan. But if you lose your job, you'll likely be stuck with higher payments you might not be able to afford. If job stability is a concern for you, keep a 30-year loan and consider increasing your monthly payment now--while you have a job--to the rate it would be for a 15-year fixed-rate loan.