Refinance despite the hurdles

House and calculator on $20 bills

Mortgage rates are off their historical lows of 2010, but they remain affordable enough to make refinancing worthwhile for some homeowners.

Unfortunately, about half of all applicants are being rejected because they have too much debt, too little equity or insufficient incomes to meet strict new qualification standards.

Even if you do qualify, you may find the additional costs to borrowing, such as mortgage insurance premiums and new fees recently announced from Fannie Mae and Freddie Mac, make it prohibitively expensive to refinance.

These 6 smart moves can help you determine the best options for your situation:

Smart move 1. Shop around for the best deal.

For many borrowers, the best deal may no longer be the 30-year, fixed-rate loan. Average rates on 30-year loans are now about 5%, more than half a percentage point higher than they were as recently as last November.

By contrast, the average introductory rate on a five-year, adjustable-rate mortgage is about a point less. You should only consider switching to a short-term ARM if you don't plan on staying in the house very long.

Our ARM or fixed-rate calculator can help you compare different types of loans, while our extensive database of mortgage rates can help you to compare loans being offered by dozens of lenders in your area.

Some of the best loan deals can be found at local credit unions. They often charge lower rates and fewer fees than commercial banks.

To locate one near you, go to findacreditunion.com and check their mortgage rates.

Smart move 2. Not enough equity? You still have options.

Most lenders won't refinance your mortgage unless you have 20% equity in your home -- a tough criterion to meet if you live in an area where property values have fallen 20% or more.

(To calculate your percentage, subtract the balance on your existing mortgage, plus any home equity loan debt you may have, from your home's current value and divide the difference by the current value.)

You can overcome the equity problem by applying for one of the federal government's three big loan programs. You'll need:

In order to qualify, your existing mortgage must be owned or guaranteed by either Fannie Mae or Freddie Mac, and you must not have been more than 30 days late making a payment in the past year.

Smart move 3. Refinance if you can lower your mortgage rate by a percentage point or more.

This is still a good rule of thumb to follow when deciding whether you've found a worthwhile deal:

Reduce your interest rate by one percentage point, and you'll reduce your monthly payments by $65 a month for every $100,000 you borrow.

Our refinancing calculator can help you evaluate any offer more precisely.

It will calculate exactly how much your payment will decrease and how long it will take to recoup any fees and closing costs. A year or less is ideal. Two years or more is too long and indicates the fees are too high for the interest rate you're being offered.

However, if you've been out of the mortgage market for a while, you may be surprised to learn you will have to pay mortgage insurance if your equity is less than 20% because the value of your house has dropped.

If you have to pay mortgage insurance this time, the extra amount you'll pay each month may mean the old 1% rule may not work. You may need a 1.5 or 2 percentage point difference in rate to justify refinancing your home.

Smart move 4. Reduce the term of your mortgage.

If making your current monthly mortgage payment isn't a problem and you'd like to save a ton of money on interest charges over the life of the loan, you might consider refinancing into a shorter-term loan.

The rates on 15-year, fixed-rate mortgages are about three-quarters of a percent lower than on 30-year, fixed-rate loans.

If you can afford a higher monthly payment, you can greatly reduce the number of mortgage payments you'll have to pay and save a fortune in interest.

For example, by refinancing from a 6.5% 30-year mortgage to a 4.5% 15-year loan, your monthly payment will increase by $266 a month on a $200,000 mortgage. But you'll save up to $180,000 in interest depending on how far into the life of the 30-year loan you are at the time you refinance.

Smart move 5. Get a home equity line of credit.

If you have lots of equity in your home, it can make sense to borrow an extra $20,000 or $30,000 to repay credit card bills or other high-cost debt.

But lenders are very reluctant to do cash-out refinancings right now because those loans have been more prone to default and home prices continue to fall in many areas, cutting into the value of their collateral.

Think about a HELOC instead. HELOC rates at many lenders are about 5%, and many don't charge any fees or closing costs. You only need to borrow what you need. Many banks require you to pay interest only during the first 10 years on your loan, so your monthly payment will be very low.

What's more, unlike credit card and other types of loans, the interest is usually tax-deductible. However, you will likely need excellent credit to qualify.

Smart move 6. Pay attention to your debt-to-income ratio.

Lenders consider the amount of debt you have to be just as important as your credit score.

They usually want your regular monthly debt bills to consume no more than 36% of your pretax income.

They'll count all the payments you make on auto loans, student loans and credit cards, as well as alimony, child support and the projected cost of the mortgage you're seeking.

If those expenses consume more than 36% of your income, look for the quickest and easiest ways to trim those costs.

Anything that lowers your debt-to-income ratio to less than 36% will dramatically improve your chances of being approved.

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