The government's Making Home Affordable initiative is designed to help millions of homeowners stay in their homes through refinanced mortgages or loan modifications.
To qualify, you must:
You have an Adjustable Rate Mortgage (ARM) which was doing fine enough that you bragged about it but your loan is going to reset to a higher interest rate amidst market uncertainty and everyone is buzzing about it. Lying awake at night is interfering with your job, so you figure you'd better say goodbye to that low but fluctuating interest rate, and get a nice secure fixed-rate loan before the swing hits the sky.
This is a common scenario these days as interest rates inch up and many homeowners who opted for ARMs in the past 10 years are hoping to switch to a traditional loan.
Switching types of mortgages, as described above, is one reason people refinance, which is simply replacing a current mortgage with another. But there are others.
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Most of the things fees, appraisals, title insurance that went along with an original mortgage hold true for a refi, which means it can cost a fair amount to change loan types. How quickly you recoup the cost depends partially on how long you are going to keep the mortgage. If you are going to be in your home long enough to recover the costs, and get some benefit from lower interest payments over the life of the loan, then it's a no-brainer. But balancing the cost with the benefits of a new mortgage is critical. Use an online calculator to figure it out.
Be sure to remember that closing costs include another appraisal (no matter how recently you've had one), a new credit report, underwriting fees, title insurance, escrow fee, recording fees, and perhaps other small fees. These costs typically range from $1500-$2000. (Some lenders are willing to waive the closing costs for a higher interest rate loan.)
You can pay points on a refinance loan, same as on an original mortgage, but unlike with the original mortgage, the points are tax deductible over the entire term of the loan rather than just in the first year. Points make sense when rates are on the upswing and you want to get in on the lowest possible rate.
But, except in some cases, points are a fact of life: if you are paying a 1-point fee on a $100,000 refi, you can add $1000 to your closing costs.
You also need to look at your current mortgage to see if there are pre-payment penalties. And what happens to your old mortgage? It's paid off by the new loan, as are any other liens; at the end of the refinance process, ideally you should have only one loan. (If you have more than one mortgage, however, it's possible to refinance just one of the loans if the lender agrees.)
The easy way to figure out if refinancing makes sense is to figure out how long it will take you to pay off the closing costs with the savings you realize with lower monthly payments. If it is longer than the time you plan to stay in the house, then refinancing might be a good option. You have fewer tax breaks with a lower-rate refi, so be sure to ask your lender for a refinance break-even table that will take that into account.
© Zillow, Inc. 2009. Originally posted - Refinancing