REAL ESTATE


Refinance, If You Can

Refinance your mortgage now and you may capture the lowest interest rate of your lifetime. But unlike a couple of years ago, when it seemed all you needed was a pay stub (if that) and an eager mortgage broker, today's process can be tedious. That's because the demand for refinancing is high, standards are stricter, and the number of people processing mortgages is down. Here's what you should know before you refinance.

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What's the outlook for rates?

Expect the 30-year fixed rate to hover near 5% for the balance of this year or, if the economy improves a tad, to creep up to 5.25%, says Keith Gumbinger, of financial publisher HSH Associates. HSH's survey of lenders pegged the national average 30-year fixed rate at 4.97% the week ending May 1. The average 15-year fixed rate was 4.68% and the average 5/1 adjustable-rate mortgage (which has a rate that's fixed for five years, then changes every year after) was 4.91%.

Given that the spread is so narrow between a 30-year fixed-rate loan and a 5/1 ARM, and that rates are at historically low levels, it makes no sense to take out an ARM now.

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Rates will rise when inflation heats up, but that's not an immediate risk. Kiplinger's forecasts that the rate of inflation will stay steady for at least the next couple of months.

Who qualifies for the best rates?

You'll generally get the lowest rate on loans backed by Fannie Mae or Freddie Mac -- together they back about two-thirds of all mortgage loans -- if you're taking out a conforming loan, and if you have a credit score of at least 720 and equity of 20% or more. Other factors that will help: if the property you're refinancing is the single-family home you live in, if you don't take out some of your equity in cash when you refinance, and if you don't take out a home-equity loan or line of credit. Of course, you can reduce your rate by paying points at closing. A discount point is equivalent to 1% of your loan amount. Paying one point usually lowers your interest rate by 0.25 percentage point.

What documents will I need?

To get the most accurate estimate of the rate for which you'll qualify, provide a prospective lender with your FICO score ($8 with the Equifax report when you order free credit reports from www.annualcreditreport.com) and an estimate of your home's market value. You can get this from a real estate agent or from sources such as Zillow.com and Trulia.com, which will show you recent comparable sales in your area.

When you apply to refinance your mortgage, you must provide pay stubs from a recent month, two months of bank and other financial statements, two years of W-2s and, if you're self-employed, two years of tax returns showing self-sustaining income. The requirement for all these documents contrasts with the "no-doc" or "liar" loans available during the real estate boom that allowed borrowers merely to state their income without providing proof.

You can take additional measures to speed up the process. Phoenix mortgage broker Tracy Tolleson urges his clients to fill out an application and pay for an appraisal (about $350) ahead of time. That can be particularly helpful if you're delaying your application in order to lock in a lower rate. There is a brief lag in applications to lenders between the time rates drop and the point that lenders become swamped with new customers. With all your paperwork in order, you can beat the rush.


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