Is refinancing right for you?

By CRAIG WIECZORKIEWICZ - Times-Press.com

Interested in refinancing your home to take advantage of declining mortgage rates, but unsure whether such a move is right for you? There are several questions experts say you should ask yourself to make an informed decision.

• Foremost among those questions is whether your debt-to-income ratio can improve if you refinance, says Marlene Adams, managing officer at Streator Home Building and Loan Association. If you find that you'd be paying more than a third of your gross monthly income toward the refinanced loan each month, then it's probably not a good idea to change your mortgage payment now, she said.

Dan Sabol, regional sales manager and a loan originator for UnionBank in Streator, agrees.

“It all comes down to payments,” Sabol said. “People have to live within their means.”

Sabol suggested that a refinanced loan is not worth the change in payment unless the homeowner will save $50-$75 a month.

When figuring what their potential savings would be, homeowners need to remember several fees are involved with refinancing, Sabol said. Standard fees typically include title charges, appraisal charges, underwriting/processing costs and a credit report fee.

If a property appraisal is not needed, the average cost of refinancing falls into the $700-$800 range, Sabol said. If an appraisal is needed, refinancing will cost at least $1,000, he said.

Other experts said the cost can be as high as $1,800.

• Another important question for homeowners to ask themselves is how long they plan to live at the property in question, said Lisa Terry, mortgage loan officer at Castle Bank in Sandwich.

The longer a homeowner expects to live at the property, the better an idea it is to refinance, says Holden Lewis, a mortgage expert at Bankrate.com, an online financial service based in North Palm Beach, Fla.

“Even if the rate goes down just a little, if you think you'll be in the house a long time, it might pay to refinance,” especially to lock in a fixed rate for 15 years or 30 years, he said.

Lewis said that some good candidates for refinancing are:

• People with outstanding home equity lines of credit.

Home equity lines of credit carry variable rates that are tied to banks' prime lending rate, currently 6 percent.

“There are people out there who took out a home equity line of credit at, say, 4 percent or 5 percent, that's now pushing 6 percent or 7 percent,” Lewis said. “Some might want to refinance their mortgage and pay off their outstanding mortgage and their line of credit.”

• People paying for mortgage insurance or carrying a “piggyback” loan.

Home buyers who put down less than 20 percent of the purchase price on a home often are required to pay for private mortgage insurance. To avoid such insurance, they can take out so-called piggyback loans.

“You might be able to pay off that piggyback and the first mortgage by rolling them together into a new mortgage,” Lewis said. If the home has appreciated, the new loan will cover 80 percent of the home's value and private mortgage insurance won't be needed, he added.

• People with adjustable-rate mortgages.

“Some homeowners are starting to get nervous and thinking, ‘Maybe I should lock in a fixed rate,' ” Lewis said.

Lewis said the rule of thumb used to be that a homeowner had to be able to lower the interest rate on a mortgage 2 percentage points to make a refinancing worthwhile, but that's not necessarily the case anymore.

“Now you need to look at what your closing costs are, what your savings (on monthly payments) are and how long you intend to stay in the house,” he said.

REPORTER Tammie Sloup and The Associated Press contributed to this article.

More Mortgage News