FHA last resort?

Federally backed loans: Is the

FHA a lender of last resort?

Federally backed loans: Is the FHA a lender of last resort?
The government wants Americans to buy a home. That’s why the Federal Housing Administration offers programs to help people get their foot into the door of the housing market. But is anFHA loan right for you? What are the requirements to get one? And are there other lending products on the market that are going to make more sense for you and your family? Read on to find out.

Who Is an FHA Loan For?

“By and large, FHA loans are for people without a lot of cash, who don’t have other options,” says Mike Sullivan, director of education with Take Charge America. “Even though there are other lending options out there, this is still the fallback for people with poor credit.”

For example, Sullivan points out that the base FICO for a 3.5% mortgage is 580. What’s more, someone with a FICO score of 500 can often qualify for credit products with 10% down. This makes the FHA loan attractive for those who have particularly poor credit, but want to repair that in part by getting their foot in the housing market.

Katie Miller, vice president of mortgage products with Navy Federal Credit Union thinks “FHA loans are a great product for individuals who don’t have a lot of money to put down.”

However, NavyFed generally offers these same customer 100% financed, no-money-down mortgages.

“FHA loans are really a niche product for us, whereas the no money down mortgage is a niche product for a lot of other people,” Miller said.

While Sullivan is quick to point out that it’s mostly a product for people with poor credit, he also says that it’s not a bad deal. The main problem is the 1.75% mortgage insurance on the total purchase price, which has to be paid up front or rolled into the cost of the loan.

“It makes borrowing money very expensive,” he says. To that end, Sullivan urges people to look for the cheapest deal possible to help get them into a home. That might be an FHA loan or it might not be.

John Heath, directing attorney with Lexington Law, agrees.

“That you’re getting an FHA loan doesn’t mean that you won’t be charged more for the money that you’re being loaned,” he says. He also points to restrictions on who can get an FHA loan, such as people who have recently filed for bankruptcy.

What Are the Perks of an FHA Loan?

Other than making the housing market accessible for those with poor credit, the FHA loans offer forbearance options that you won’t find in traditional mortgage products. What’s more, Sullivan recommends the FHA loans for people who are looking to buy homes and fix them up, something that these loan services are uniquely qualified to do.

Known as a 203k loan, this allows you to borrow money for the purpose of making non-structural changes to a home, such as putting in new carpeting or painting. What’s more, Miller points out that there’s a very low down payment needed for an FHA loan: just 3.5%.

“If you’re looking for a modest property, that’s really what this product is tailored for,” says Heath.

What’s the Down Side of an FHA Loan?

The main downside of the loan is that the interest rates might not be super attractive. As Sullivan pointed out, these are products mostly for people with less than optimal credit.

“The FHA controls the terms of the loan, but it doesn’t control the rates,” he says. What’s more, Sullivan points out that there are far more rigorous underwriting requirements when getting an FHA loan. These have nothing to do with your lending institution and everything to do with the Department of Housing and Urban Development.

Heath explains further: “HUD doesn’t finance the FHA loans. It’s an insurance program. An FHA loan is from a lender, but it’s ensured by HUD. The original purpose was to get first-time buyers into their homes.” In other words, it takes a lot of documentation.

While the low cost of entry might be attractive to some people looking to enter the housing market without a lot of cash on hand, it’s best to look around and see what other loan products are on offer before committing to an FHA loan. This is due to both the high cost of borrowing money, as well as the comparatively large amount of documentation needed to get the loan. Still, for borrowers looking to get into the housing market, an FHA loan might be their only option.

Four easy ways to save on your mortgage

Don’t settle for the status quo when it comes to your mortgage. Being proactive during the lending process could save you money.

From Yahoo Homes 11/21/14

Easy ways to save on your mortgage
Easy ways to save on your mortgage

No one ever said buying a home – and keeping up with monthly mortgage payments – was easy. And with mortgage rates and other related costs projected to rise, you might think that it’s not the right time to buy a home, but that’s not necessarily true.

“This is still an incredible time to be a homeowner with prices still off the highs of 2007’s peak and today’s rates allowing you to get a better bang for your buck,” says Brian Fishman, vice president of mortgage lending at Millennium Bank in Illinois. According to him, he’s witnessed significant highs and lows while being in the mortgage banking and brokering business for more than 20 years and currently, rates are still at historic lows.

However, even with low rates, you should be proactive in trying to get the most affordable mortgage possible. So keep reading for how you can save big on your home purchase.

Interest rates are projected to rise, so take advantage of rates while they’re still low.

Most economists agree interest rates are going to go up, according to Cameron Findlay, chief economist for Discover Home Loans in California.

“If rates move [up] very quickly, that can cause some severe shocks, as opposed to rates moving at a more moderate pace increasing over time,” says Findlay. Right now, though, the jury’s out, as rates can be volatile if not illogical, he explains. But the good news is that if the timing is right for you to buy now, you can do so and avoid any increases whatsoever while rates are still low.

“If a homeowner can get a mortgage anywhere in the 4 percent area, that is still great,”says Tal Frank, president of Physician Loans, a loan consulting company for graduates of medical school.

Already own a home? Well, if your monthly payment would decrease thanks to refinancing to a lower rate, there’s no reason to wait, says Frank.

Findlay adds that if your house has appreciated significantly since getting your initial mortgage, refinancing would allow you to secure a higher mortgage loan at a lower rate. As a result, you could take more cash out of your house for other debts, purchases, and savings, and get an increased tax deduction for the interest on the new refi.

Conversely, if your house has remained the same in value, the effect will be less pronounced and potentially not worth refinancing unless the rate you’re securing is far lower than what you initially received, according to Findlay.

Mortgage closing costs are up more than 20 percent in some states, but you can negotiate to keep them low.

When you’ve been approved for a mortgage on your desired home, you will have to pay closing costs to finalize the deal with your lender. Unfortunately, closing costs are actually up 6 percent across the board over the past year, fueled by lender fees rising 9 percent and third-party fees rising 1 percent, according to Bankrate.com.

Lender fees cover items such as underwriting, processing, document preparation, credit reports, and flood certificates on a purchase or refinance. On the other hand, third-party fees cover items such as the title company charge for verifying ownership of the property and the appraisal that assesses the value of the home. So what’s your best strategy for saving on these expenses?

As far as lender fees go, Freeborn says that generally, lender closing costs equal between 2 to 3 percent of the loan amount but have the potential to be higher. They may be paid up-front or sometimes the lender will finance them by adding them to the total amount borrowed. When comparing various home loan offers, Freeborn advises borrowers to focus on the costs that are controlled by the lender.

“Every lender has different loan programs and pricing, so it is important to look at all of these costs – not just the quoted interest rate – to help determine which offer is the best deal for the borrower,” says Freeborn. “Items and their cost that are determined by the lender include interest rate, discount points, origination charge, rate-lock fee, and any other fees for document preparation, processing, application, and underwriting.”

Frank says that while there’s not much room for negotiating lower lender fees, it is important to do your due diligence in speaking to at least a couple of lenders so you have a ballpark figure for what these fees should be.

For a quick way to compare costs of a loan across lenders, Freeborn suggests using the Annual Percentage Rate (APR) because it most accurately reflects the total cost of the loan.

“The APR reflects the combined cost of the interest rate, the origination charge, discount points and other upfront costs such as lender fees, processing costs, document fees, prepaid mortgage interest and mortgage interest premiums,” says Freeborn.

In terms of rising third party fees, Frank says the spike can be attributed to the new regulatory landscape which requires a lot more paperwork, redundancy in disclosures, compliance costs, and penalties to lenders for even minor administrative errors.

“The increased costs are to cover the new expenses that have come about since implementation of the Dodd-Frank Act. Licensing and compliance has simply gotten more expensive. Underwriters are required to be a lot more thorough, which is increasing costs. Appraisal costs have increased due to the required use of third party appraisal management companies,” says Frank.

So what does that mean to you, the prospective homeowner? Well, given your particular loan type and your specific part of the country, Frank says there are certain ranges that are appropriate for these third party costs.

To avoid being overcharged, Frank suggests going over the numbers you’ve been quoted with your real estate agent and lender, both of which should be familiar with the individual rates in your area.

Typical appraisals, for example, run from $350 to $1,000, depending on the size and value of a home, so anything higher or lower could be a scam that could cost you big time now or down the road, says Fishman.

The bottom line here is that you have to do your research, because saving money could be as simple as having a few conversations with industry pros and local homeowners to make sure you’re being quoted reasonable numbers.

Mortgage insurance costs are increasing, so try to save for a higher down payment to eliminate PMI.

According to Fishman, private mortgage insurance (PMI) is required for any borrower putting less than 20 percent down on a purchase or having less than 20 percent equity in the real estate on a refinance. Monthly PMI payments have been increased over the past five or so years and the cost shouldn’t decrease in the near future, according to Frank. He attributes PMI increases to the rash of defaults several years ago when several mortgage insurance companies went under.

For Frank, the best way for a consumer to combat the increase is to avoid loans with mortgage insurance altogether. But since that requires 20 percent down, it’s not always feasible, so the next best option is to get a loan with a lower mortgage insurance rate, he explains.

Frank says insurance rates are based on default rates of the population. Since FHA loans only require 3.5 percent down and allow lower credit standards, Frank says it has among the highest default rates and therefore the highest insurance costs.

A better option would be to aim for a Fannie Mae or Freddie Mac loan, which only requires 5 percent down and a lower PMI payment, which means cheaper monthly payments over the life of the loan, says Frank.

“By making sure you can afford a 5 percent down payment and that you have a high enough credit score to qualify for a Fannie or Freddie loan, you can save on your total PMI cost,” says Frank.

Even if you can’t afford the 20 percent down payment it takes to opt out of PMI, you can still decrease your mortgage insurance rate, no matter the type of loan, by simply putting more money down, he explains.

“So just saving for a higher down payment will lower [your] mortgage insurance,” says Frank.

Don’t miss out on special mortgage programs made for your unique home buying situation.

A penny saved is a penny earned, right? Well, if you want to catch a break on your mortgage, you’ve got to be your own advocate. It never hurts to ask about government programs, or if you’re working with a small local bank, other creative ways to finance your home purchase.

Are you a first-time homebuyer, buying in a historic district, or planning to make home improvements? This is the kind of information you should be disclosing to your lender or loan officer, since there might be a grant or program that could save you money your home loan.

For instance, if you’re considering a refi, you might be best served by going back to your original lender if you had a positive experience. Many banks have a repeat customer discount that you could take advantage of the second time around, which may compound the savings you’d incur by refinancing to a lower rate.

For example, you might be able to forgo the origination fees on your second loan, a bonus that Discover Home Loans offers to their customers, according to Freeborn.

Working with a small community bank can have its upside as well. “As a local bank in the state of Illinois, we are able to participate in some grant programs with as little as $1,500 down with limited funding available on an annual basis,” says Fishman.

According to Fishman, if you opt for a small local bank, the key to saving is explaining your finances, payment capabilities, and housing preferences upfront so a lender can tailor a loan to you specifically and ensure that your game plan, depending on cash flow and savings, is feasible.

Don’t Let Bigger Homes Drag Down your Retirement

Big homes can complicate


The pricier the house, the bigger the financial drain

Large estate
Once you’ve paid for your house, how much will it cost you?

This is a crucial issue for anyone looking ahead to retirement. The more expensive your home, the more of a drain it’ll likely be in terms of property taxes, maintenance, homeowners insurance and more.

Suppose you own a home that, in addition to any mortgage payment, costs $1,000 a month. You then get a fat pay raise, prompting you to trade up to a larger house, which has double the monthly expenses.

Result: If you stay in the larger home during retirement, you’ll need to come up with $2,000 a month, equal to $24,000 a year. Based on a 4% annual portfolio withdrawal rate, that would mean $600,000 in retirement savings just to pay your housing costs, versus $300,000 for the smaller home.

“I’ve always been an advocate of modest homes,” says Charles Farrell, chief executive of Denver’s Northstar Investment Advisors and author of “Your Money Ratios.” A large house “means higher costs in retirement and it makes it more difficult to save while you’re working.”

Hitting Home

Whatever price you pay for a house, it’ll often end up costing you at least 2½ times as much over the long term, Mr. Farrell reckons. Say you buy a $500,000 home, put down $100,000 and borrow the other $400,000.

You’ll pay back the $400,000 with that portion of every mortgage payment that goes toward principal. In addition, you might cough up another $250,000 or so in interest, even after figuring in the tax deduction. This assumes a 4.5% 30-year fixed-rate mortgage and a 25% federal income-tax bracket. Add that to the purchase price and you’re up to $750,000.

On top of that, Mr. Farrell figures the house might cost $20,000 to $25,000 a year, between property taxes, insurance, maintenance and occasional improvements. To generate that income in retirement, you might need $500,000 in savings, and probably more once you figure in the taxes on any investment gains. That brings the total tab to $1.25 million, or 2½ times the purchase price.

Mr. Farrell’s estimate for housing costs might strike some readers as high. It’s easy enough to get a handle on property taxes and insurance. Annual property taxes typically run 1% to 2% of a home’s value, while insurance might equal 0.5%.

It’s harder to get a grip on maintenance and occasional improvements, in part because homeowners may go a few years without any major expenses, but then fork over hefty sums for a new roof or a kitchen remodeling. These projects, which are often necessary just to maintain a property’s value, are easy to dismiss as one-time expenses—and yet they seem to roll around with fair frequency.

Whether you think Mr. Farrell’s numbers are too low or too high, he makes an important point: High housing costs can make it tough to retire, because they crimp our ability to save while we’re working and increase the nest egg we’ll need to retire in comfort.

Indeed, Mr. Farrell advises folks to buy homes that cost no more than 2 to 2½ times their gross income. That’s doable in many parts of the country, but it’s almost impossible if you live in a major city on the East or West Coast.

“The coasts are tough,” Mr. Farrell concedes. “I know people aren’t happy with those figures, but they’re prudent.”

Two Lessons

This issue of housing costs brings together two themes I often harp on. First, you’ll have more financial breathing room—and less financial stress—if you hold down your fixed living costs, including mortgage or rent, car payments, property taxes, insurance premiums and utilities. One rule of thumb: Try to keep these costs to 50% or less of your pretax income. That way, if you’re laid off, you know you can get by on half of your old salary.

Second, temporarily cutting back spending is a key financial tool, especially for retirees faced with rough financial markets. The lower your fixed living costs, the more flexibility you’ll have.

Still tempted to buy the big home? Keep Mr. Farrell’s math in mind.

“If you’re going to buy an $800,000 house, the real cost is close to $2 million,” he says. “You have to ask yourself whether you can afford it. It’s a tough one to fight against, because people still have this perception that a home is a good investment. But most of the time, it’s a money pit.”

$0 Money Down Mortgages

You can still find “No Money

Down” mortgages, but are they

worth the risk?


No money down mortgages? Do those still exist? In the wake of the financial crisis of 2008 and the collapse of the housing bubble, a lot of people think that the no money down mortgage has gone the way of the dinosaur. However, while these types of products are rarer than they were throughout the last decade, they can still be found. The no money down or 100% mortgage is a double-edged sword: on the one hand, it can allow people in expensive markets to get their foot in the door. On the other hand, they often come with very high fees and interest rates. So how can you know if a no money down mortgage is right for you and your family?Where Are the No Money Down Mortgages?

Mike Sullivan, director of education with Take Charge America, points out that there are a number of no money down mortgages specifically targeted for niche groups of Americans.

“VA mortgages often require no down payment, but there’s still a funding fee of 2 or 3%,” he says. That fee has to be paid in advance, so that constitutes a sort of down payment in and of itself. What’s more, Sullivan points out a U.S. Department of Agriculture program that offers rural housing at no money down. “This can be an attractive option for people who have no cash,” he says, adding that you can’t get that loan anywhere, but you can get it more places than you might think — some suburban areas are considered “rural” by USDA.

In fact, Sullivan is incredibly bearish on the question of a no money down loan. “Outside of a government program, I can’t see anywhere that this would be a good idea,” he said.

Why’s that? Sullivan argues that consumers ought to be wary of lenders willing to give you a home loan when you have no skin in the game.

“It’s a bad idea for lenders, so why are they doing this?” he says. It might be a good idea for a borrower because of the availability of the money up front with very little risk. Still, Sullivan points out that in most cases this is going to mean exorbitant interest rates that aren’t really going to make it worth it in the final analysis.

John Heath, managing attorney with Lexington Law, is rather blunt.

“I think these types of products are what got us into trouble back in 2008,” he says. “Basically how these work typically is they give you a mortgage for 80%, then finance the remaining 20% with a second mortgage.”

He also pointed to government programs that allow no and low money down.

“You need to be mindful of the product you’re looking at and know your limits on what you can afford,” Heath says.

However, there’s one place where you might be able to get a no money down mortgage without a high interest rate or crippling fees: your local credit union.

Credit Unions and No Money Down Mortgages

Banks are run on a for-profit basis for investors. In contrast, credit unions are membership organizations run not for profit. This makes it easier for them to offer no money down mortgages for their member-owners. Katie Miller is vice president of mortgage products with Navy Federal Credit Union, one of the few institutions around still offering no money down mortgages after the housing crunch.

“First-time homebuyers are the ones looking at our no-money down mortgages,” she says, adding that most of the time these can make more sense than an FHA loan.

In terms of getting a return on the loan, their 100% loan products performed better than industry prime. So what if you have a bunch of money saved up for a down payment and you qualify for a 100% mortgage? Miller points out that NavyFed does a holistic approach, which looks at a number of loan products and helps people to figure out which will work best for their near- and long-term plans.

However, if the consumer opts for a no money down mortgage and still have a substantial down payment, there’s ways to put that money to good use throughout the mortgage process.

The no money down loan itself has a 1.71% funding fee, which can be wrapped into the loan but also can be paid up front using what was going to be your down payment. There are also closing costs associated with buying a new home that you can put that down payment money toward.

If you do opt for a no money down loan, you should talk to a financial advisor, whether it’s a loan advisor or an investment professional, about what you should do with the significant chunk of change you’ll have lying around after getting that kind of loan product.

In the final analysis, if you qualify for a no money down loan, it’s best to look at it from a holistic perspective: How much is the interest? How much are the fees? Are there other loan products that will meet your needs with lower costs?

Buying a home is getting easier

Why buying a home is getting


A new Federal Reserve study finds that it’s actually getting easier to qualify for a mortgage.

From Yahoo Homes 11/17/14

It’s getting easier to buy a home

If you’ve gotten turned down for a mortgage in the past few years, now might be a good time to re-apply.

That’s because, according to Ellie Mae research, in July 2014, 67 percent of all mortgages applied for closed. That’s way up from six months before in January 2014 and also in July 2013, when the rate of mortgages that closed were at just 53 percent at both times.

And in part this is due to lenders easing qualifying standards, says Jonathan Corr, president of Ellie Mae, a mortgage tracker through which 20 percent of all mortgages pass.

So if you thought you didn’t have a high enough credit score or that you had too much debt to qualify for a mortgage, read on. You may be pleasantly surprised.

Reason #1: Lower Credit Score Requirements

Your credit score is one of the first things that lenders consider when deciding whether to lend you the money for a home. It not only influences what interest rate they’re willing to offer you, but also whether or not you qualify for a mortgage in the first place.

So you’ll be happy to know that the required credit scores to qualify for a mortgage have come down. In fact, in July of 2014, the average score for qualification hit 727. And although that might still seem high, consider that it has been as high as 750 in the past few years, according to Corr.

“People get worried when they see the 727 average, but they should remember that that’s just an average. You can have a lower score and still qualify,” he says. In fact, they are seeing many more people qualifying with credit scores below 700, he says.

That fact is reflected in the finding that 32 percent of closed loans had an average FICO score of under 700, up from 25 percent in July 2013.  As for denied mortgage applications, the average credit came in at 689, down from 702 in July, 2013.

Reason #2: Higher Debt-to-Income Allowances

We Americans love credit. Unfortunately, we sometimes love it a bit too much, leading to too much debt. That’s something American lenders don’t like to see when deciding whether or not to hand out mortgages. But there are indications that lenders are loosening the screws when it comes to the amount of debt you can carry and still qualify for a mortgage, says Corr.

First, it’s important to understand that lenders assess your debt through what is known as your debt-to-income ratio. Simply put, this is the percentage of your gross monthly income that your total monthly debt obligations take up.

Debt obligations are such things as credit card payments, car and personal loan payments, and the proposed mortgage payments and taxes on the house you want to buy, says Corr. Things like food, electric bills, and school tuition don’t count (student loan payments do, however).

So, if your gross monthly income was $5,000 and all your debt payments came to $1,500 per month, you’re DTI would be 30 percent. You would also be in really good shape to qualify for a mortgage, by the way, according to Ellie Mae’s data.

That’s because, as of July, 2014, the average DTI for closed mortgages stood at 37 percent, up from 36 percent in 2013. “But we’ve seen them as low as 34 percent so this is a good sign,” says Corr. He explains it’s a good sign because the higher DTI means lenders are more confident in the economic recovery and people’s ability to stay solvent – and pay their mortgage – with a little more debt.

He adds that, like credit scores, this is an average and should not worry those with slightly higher DTIs. He believes that borrowers with a DTI of 40 or even 43 percent can qualify. Case in point, the average DTI for denied mortgages was 45 percent.

Reason #3: Fewer Investor Overlays

Right about now, you are probably saying, “What the heck is an investor overlay?”

Investor overlay is a fancy term for stricter standards imposed by the lender, or bank, but not required by the government.

They come into play a lot with government products such as FHA mortgages, which are loans that are insured by the Federal Housing Administration and made available to consumers by banks and other mortgage lenders.

For instance, FHA guidelines allow for as little as a 3.5 percent down payment and a minimum 580 FICO credit score, according to a press release published by the U.S. Department of Housing and Urban Development.

But that’s not exactly how it has worked. Lenders that handle FHA mortgages are allowed to set their own investor overlays – as long as they don’t contradict FHA guidelines – and traditionally, they have, says Duffy. For example, due to fears of making bad loans, lenders have made the cutoff for FHA mortgages as 620 to 640 for many years, he says.

Lenders do this because if too many borrowers default on the loans they make – forcing the government to bail them out – the lender cannot only lose a lot of money, but get fined or worse, says Duffy.

But the good news for you is that thanks to the strengthening housing market and economy, lenders are imposing less restrictive overlays, says Duffy. In fact, recently, Duffy says most major lenders have lowered that score minimum to 600. Still not the FHA floor of 580, but a good sign for borrowers.

This could be your last shot to refinance a mortgage

This Could Be Your Last Shot to Refinance a Mortgage

This Could Be Your Last Shot to Refinance a Mortgage

After the Fed’s announcement Wednesday that it would end its historic $3 trillion bond-buying program, mortgage rates predictably began to rise.

The good news is that they were rising from the lowest rates of the year, after tumbling through most of October. At just over 4 percent, today’s mortgages rates still remain extremely low by historical standards. In 2008, before the housing busts, rates were around 6.5 percent.

Millions of Americans have already taken advantage of the opportunity to refinance at record-low rates these past few years. Despite this environment, one in five households that could have refinanced in recent years had not done so, according to a recent paper published by the National Bureau of Economic Research. The cost to those homeowners: about $11,500 each over the life of the mortgage.

If you’ve been procrastinating or if you’ve only just gained enough equity to refinance, this may be your last shot.

The Fed’s decision, combined with the economy’s continued positive momentum, means the mortgage rate upward climb may not end anytime soon. The Mortgage Bankers Association predicts rates will reach 5.1 percent by the end of next year and 5.8 percent by the end of 2016.

“The window for refinancing may not be open for that long,” said Bill Hampel, chief economist of the Credit Union National Association. Homeowners are taking note: Nearly two-thirds of all mortgage applications last week were to refinance.

Here’s how to figure out whether this move is right for you.

Run the Basic Numbers

Use a mortgage calculator to determine how much your monthly mortgage payment would change based on a new lower rate. Then factor in closing costs, which are typically 2 percent to 5 percent of the value of your mortgage.

Divide the total amount of closing costs by the amount you’ll save each month to determine how many months it will take to recoup your fees. If it will take less than three years, and you plan to be in your house for more than five years, it’s probably a “no-brainer” to refinance, advises Hampel.

The decision is a bit trickier if it will take you longer than three years to break even. If you won’t recoup your costs for six years – then refinancing probably doesn’t make sense.

Consider Other Factors
What kind of mortgage do you have? If you’re in an adjustable-rate mortgage and plan to stay in your home for a long period of time, it may be worth refinancing at today’s rates to lock them in for the long term, even if it means making a higher monthly payment in the short term.

Refinancing also often means resetting the clock on your mortgage. If you’re decades into paying off a 30-year mortgage, you may not want to commit to another 30 years of housing debt, even if it’s at a lower rate. You might consider instead a 15-year loan, which has a lower rate and higher monthly payments but will have you owning your house outright much sooner.  “Think about you particular situation not just now, but five, ten, twenty years from now,” said Avani Ramnani, director of financial planning and wealth management at Francis Financial in New York.

Another incentive to refinance is the chance to merge loans. Refinancing lets you consolidate a second mortgage or a home equity loan with your home mortgage, which can save money by allowing you to pay one low rate on the entire amount, instead of a low percentage on your primate mortgage and a higher one on the other loans.

Get Ready to Jump Through Hoops
Banks are stilled scarred from the housing bust and are dealing with significant changes to the regulatory environment, so lending standards are much tighter than they were in the past. Even former Fed chair Ben Bernanke recently admitted to having had his mortgage refinance application rejected.

To get the best rate, you’ll need excellent credit and lots of documentation of your income and assets. The average credit score for closed loans in September was 726, according to Ellie Mae.

Finally, shop around. “Talk to a big bank, talk to a little bank, talk to a mortgage broker,” says David Reiss, a professor of real estate finance at Brooklyn Law School. The gap between the best and the worst mortgage deals can be as much as a full percentage point.