Reconsidering refinancing

With mortgage interest rates hovering around 50-year lows, refinancing is an appealing prospect for many homeowners. I think this is especially true considering the stock market's August gyrations. Taking nervous energy and using it to focus on sure-thing money moves such as lowering payments or paying debt faster makes sense.

According to Freddie Mac's weekly rate survey, a 30-year, fixed-rate mortgage averaged 4.22 percent. Slice the term in half, and the rate is 3.39 percent for a 15-year, fixed-rate mortgage.

Problem is, refinancing isn't always possible for homeowners.

The key culprit? Home equity. More than 90,000 Minnesotans were saddled with negative equity in the first quarter, according to data from CoreLogic, with another 30,000 having next-to-no equity in their homes. While refinancing is possible with as little as 3 or 5 percent home equity, it may be less worthwhile after taking mortgage insurance and closing costs into account, said Alex Stenback, a mortgage banker with Residential Mortgage Group in Minnetonka.

If you don't have home equity, you still may qualify using a government refinancing program called HARP. Greg McBride, senior financial analyst at Bankrate.com, says HARP is "the Rodney Dangerfield of government housing programs ... all the attention goes to the loan modification program, which hasn't solved any problems." But HARP (for Home Affordable Refinance Program) can be tough to qualify for, especially for borrowers with second mortgages and mortgage insurance. Plus many homeowners who qualify have already taken advantage of this program.

Lenders also want to see consistent, steady income. "If they've had challenges with employment in the last two years, gaps in their employment, that would be the second-biggest challenge," said Kara Egan, vice president of Edina Realty Mortgage. "You'd typically need to be back on the job for six months," she said. Recent retirees or families relying on self-employment or contract income could also find it difficult to qualify.

Another hurdle for many burned by the recession is having a high enough credit score. The magic number to receive the very best rates is at least 740. You can still qualify for a loan with a score south of 740, but forget about getting a brag-worthy interest rate. But with today's low rates "most people have good enough credit to get the lowest rate they've ever seen," McBride said.

Here's a little-known tip for the credit-challenged but cash-flush. Surprisingly, for 15-year, fixed-rate mortgages, lenders don't adjust the rate up or down based on credit score. "If you're willing to step up and make the higher payment, they're willing to overlook credit blemishes, to a degree," said Dan Hughes, loan officer at Summit Mortgage in Plymouth. Generally, you still need a credit score in the mid-600s to qualify for a loan, but if you do, your rate will be as good as your neighbor scoring north of 800.

Refinancing through FHA is also an option for those with scores in the 600s, but a recently increased upfront mortgage insurance payment makes it less attractive.

Refinancing isn't the only smart move

So you are the poster child of financial health. Does it always make sense to refinance? For Wanda Kath, who has had the same mortgage at 6.65 percent that her family used to buy its "forever" home in Buffalo 18 years ago, looking into a refinance is a no-brainer. Even if the she took the no-closing cost route, accepting a slightly higher interest rate for paying nothing at closing, she'd end up with a rate far lower than what she currently has. If she wanted, she could shorten the term of her loan to a 10-year mortgage. Or she could take the monthly payment savings and plow the money into her loan in order to pay off the loan on the existing 30-year timetable.

For rate-chasers who may have refinanced several times, the answer isn't quite as simple. Hughes tells clients that refinancing makes sense if they can pay no closing costs and still reduce their rate. But it's a hassle, and before you start the process, consider that the difference in monthly payment may only buy you a couple of pizzas. For example, the monthly principal and interest payment for a $170,000, 30-year, fixed-rate mortgage at 4 percent is $811. Jack up the rate to 4.25 percent and you'd save only $25 a month. Is it worth the hassle of the appraisal and paperwork to save that little?

Probably not.

Kara McGuire • 612-673-7293 or kmcguire@startribune.com.

Twitter: @Kara_McGuire