Refinancing: Take the Low Road

Thinking of refinancing your mortgage? Welcome to the club. With mortgage rates so low over the past few years, the question hasn't been "should you refinance?" but "when"?

While conventional wisdom once said you had to shave at least 2% off your loan in order for refinancing to make sense, these days it could be worthwhile with an interest reduction of just 0.75%, says Doug Perry of Countrywide's consumer-markets division. That's because soaring home values, increased competition and automated underwriting (which can approve or reject your refi application in a matter of minutes) have made refinancing quicker, easier and potentially cheaper than ever before.

Unfortunately, none of this means that your role in the process -- namely, making sure that you get the best loan possible -- has gotten much easier. To find the best deal, you still need to do your homework, and you need to be smart about the financing options that a lender or broker might pitch you. Otherwise, your refi just might cost you significantly more than it should.

So consider this your crib sheet. We'll give you the lowdown on some of the loan products you might be offered in this refi market, and also give you tips on how to work the system to get the best deal possible.

Timing Isn't Everything
If you're worried that mortgage rates are soon going to rise to the point where refinancing is no longer appropriate for you, you obviously want to lock in a rate as soon as possible. Then, once you have a rate locked for, say, 45 days, probably the best thing to do is to ignore the direction of interest rates. After all, should rates actually drop, you're likely to wind up flagellating yourself outside your lender's office.(To find out if refinancing makes sense for you, based on today's rates and your current APR, crunch the numbers in our Refinancing Worksheet.)

On the flip side, if you truly believe that rates are going to fall, then hold off on locking in a rate. What you most likely don't want to do is get involved with what's known as a "float down" option, which is essentially an opportunity to pay for the privilege of getting a lower rate should rates fall while you're still refinancing. As tempting as these offers might sound, they aren't free. In fact, they'll often cost you another one-eighth of a percentage point on your interest rate. In that case, mortgage rates would have to fall at least one-fourth of a point to make this deal worthwhile. And over a short period of time, that's not likely to happen. "These options often sound so good, but usually that isn't the case," says Joe Kennedy, president of, an online mortgage broker. And that's especially true in this climate, since by nearly all accounts, rates are much more likely to increase than decrease in the near term.

Bottom line? You'll make this process much easier on yourself if you don't worry too much about the direction of interest rates. Instead, find a rate that will save you some money, lock it in and, as Tony Soprano would say, fuggedaboudit. "A good deal today is going to be a good deal tomorrow," says Countrywide's Perry. And, keep in mind, while it may take a little time for rates to drop downward, rate increases happen much more quickly. Says Neill Fendly, president of the National Association of Mortgage Brokers, or NAMB: "The road to you-know-where is paved with people who waited for that last one-eighth of a percent."

A Simple Plan
When thinking about refinancing, always start with your current lender. Should your original lender still be servicing your loan (meaning that it hasn't been sold off in the secondary market to, say, Freddie Mac or Fannie Mae), you just might be able to do a "loan modification," says Keith Gumbinger, vice president of HSH Associates. Granted, the likelihood of this happening is not great, but a "loan mod" is by far the cheapest and easiest way to alter your mortgage, so it's worth asking about.

As the name implies, a loan modification is simply an adjustment to your current mortgage. Should you be eligible, your lender would modify your loan by issuing a new rider allowing you to pay a lower interest rate for the remainder of your term. There's very little paperwork involved and very little cost -- usually this can be done for a couple hundred bucks. These days, loan mods are most commonly used for customers who are experiencing severe financial problems (as a means of avoiding bankruptcy), explains Bud Carter, senior director of residential finance at the Mortgage Bankers Association. But in some cases, this might also be considered as a means of retaining a stellar client.

That said, if you have a conforming loan (i.e., one that's below $322,700) and if you've lived in your house for at least a couple of years, chances are your loan has been sold off. If that's the case, consider instead a "streamlined" mortgage. This is a quick, simple and cheap way to refinance your loan, and most major lenders, including Bank of America, Wells Fargo and Countrywide offer some form of it. The paperwork required with a streamlined mortgage is considerably reduced, and often certain requirements, like an appraisal and application fee, are waived, saving you time and money.

Of course, there are a couple hurdles you're going to have to jump over to be eligible for a streamlined refi. For starters, this service is typically only available to people who want to refinance their mortgage for the amount remaining on their current loan, Carter explains. You also typically need to have flawless credit, so if you've recently missed a few payments on your credit cards, or even just changed jobs, you're probably out of luck. Finally, some lenders offer this service only to their current customers.

Remember, Nothing Is Ever Free
Keep in mind, while refinancing can save you money over the long term, the process itself is never free -- no matter what your broker says. These days, "no-cost refis" are very popular, and it's easy to see why. The appeal of them is that you don't have to pay out of pocket for the fees typically associated with these loans, such as the application fee, title search, credit check and appraisal, which can easily total more than $1,000. You also wouldn't have to pay any points, which is also known as the loan-origination fee. A point is one percentage point of your loan amount, and the more points you pay up front, the lower your interest rate will be.

"There's no such thing as a true no-cost refi," says HSH Associates' Gumbinger. "You're trading off paying out-of-pocket expenditure in exchange for either a higher loan balance or a higher interest rate." Typically you'll pay an additional one-half to five-eighths of a percentage point more for the privilege.

Whether a no-cost refi is the way to go depends on a couple of factors. For starters, if you don't have ready cash to pay the fees and if the rate you can get even with the no-cost premium is significantly lower than what you're paying now (and you're not required to take out a higher loan), then go for it. But assuming you have the money to pay for refinancing, then you need to consider how long you'll be in the house, says Fenley. If you're planning on moving fairly soon, the no-cost refi might well make sense. Consider this: A homeowner with a $250,000 mortgage and $4,000 in closing costs would have to live in her home for about four-and-a-half years to recoup her upfront costs if she chooses a 7.5% rate vs. an 8% no-cost refi. If she couldn't be sure that she would be around for that long, the no-cost refi would indeed be a better way to go.

Finding Your Best Rate
It's infuriating. You open the Sunday paper, you see great mortgage rates, you call -- and find that those rates are no longer available. "We call it the liars' sheet,'" says Doug Anderson, president of Key Mortgage in Denver, Colo., and communication chairman of the NAMB. The problem? Since there is a lag time of up to three days before rates that are quoted are listed in the papers, those published rates are often lower than the current market. After all, a lender or broker is trying to predict where rates will be in a couple of days -- so why not lowball it?

The rates you are quoted also vary because some lenders fold fees into their rates, while others do not. And the actual rate that you are quoted based on your personal circumstances will of course depend on your credit history and the size of your loan as well as where you live.

So how do you search for the best rate? The best strategy is probably a combination of online research and old-fashioned calling around. To get a basic handle on rates, a good place to start is at which lists rates on a national, state and in some cases, local level.

You could also check out some of the online mortgage brokers and lead generators, like , and Keep in mind, while many predicted a couple of years ago that online mortgage lending would quickly start to steal business from traditional brick-and-mortar lending, it hasn't really happened in a big way. Online mortgages still represent just a sliver of the overall mortgage business.

That said, some of these sites have come a long way. At, for example, you can now truly do a refinancing entirely online, if that's what you want. (You'll use an e-signature to sign the paperwork.) And many online brokers and individual lenders, like Countrywide, have online applications, live chat and handy email alerts that are sent to you when rates fall to a specified point.

But even if you do decide to go with an online lender, be sure to work the phones, too. Call several lenders within a short amount of time -- ideally within two to three hours -- to make sure you're making an even comparison, says NAMB's Fendly. And when asking for a quote, be very specific. Tell the lender or broker what sort of fees you're willing to pay upfront as well as what sort of lockup period you want. "Consumers should expect detailed answers to their questions free of charge," says Countrywide's Perry. So beware the lender who says you need to pay a fee to get a detailed quote -- whether it's for a credit check, or some sort of "commitment fee." If that happens, move on.