Time to refinance? Good question

By MICHELE LERNER

Bankrate.com

Home mortgage refinancing may sound like a good idea in theory, but it's not always possible or desirable.
For starters, lenders have tightened up the approval process, making it more difficult to get loans.
"Homeowners today need to be triathletes to qualify for a loan, with great income, great credit and great value in their home," says Anthony Hsieh, founder and CEO of loan Depot.com.
In addition, a refinance may not make sense financially, particularly for borrowers who plan to sell their homes in the next few years.
Before taking the leap and opting to refinance, homeowners should ask themselves these questions.
Do I have enough equity?
Homeowners need to have at least 80 percent equity in their home to qualify for a new loan without paying private mortgage insurance (PMI). Adding that to the cost of a new loan could negate the benefit of a refinance.
Today, many homeowners are underwater — meaning they owe more on their mortgages than the house is worth. However, being underwater or having little equity does not necessarily rule out a refi.
"Homeowners should still apply for a refinance even if they have low equity, because there are some Fannie Mae and Freddie Mac programs and FHA loans that may accept them," Hsieh says.
How soon should I refinance?
Homeowners should refinance quickly in case the housing slump deepens, causing values to depreciate even more, says Roy Meshel, district vice president for W.J. Bradley Mortgage in Phoenix.
That can make it even more difficult to qualify for a refinance.
What can help me qualify?
Patrick Cunningham, vice president of Home Savings and Trust Mortgage based in Fairfax, Va., recommends an increasingly popular approach — the so-called "cash-in" refinance.
"Some people are opting to bring cash to the settlement in order to pay down their loan balance to qualify for a refinance," he says.
Is my credit score good enough?
Borrower credit scores play a big role in securing a good mortgage rate. In fact, you'll need a good credit score to qualify for any type of mortgage.  Mortgage rates operate on a sliding scale, with the lowest rates going to applicants with the highest credit scores of 720 or higher.  Borrowers with scores below 620 will have trouble qualifying for any mortgage.

What length of loan should I get?
Many homeowners refinance to lower their monthly payments. Others choose a shorter-term loan with higher monthly payments so they can reduce overall interest payments and own their homes faster.
"Some people are restructuring their loans to a 20-, 15- or 10-year mortgage, which works well for people with plenty of disposable income," Cunningham says.
"But I worry that people are too focused on paying off their mortgage and not integrating this decision with their overall financial plan."
Cunningham urges borrowers to make sure they contribute to retirement savings and college savings, pay off high-interest debt, and save six to 12 months of expenses "before opting for a shorter, more expensive mortgage."
Meshel says people should consider whether they want to retire without a mortgage before opting for a new 30-year loan. Those who have employment concerns may want to refinance into the lowest possible payment in case they experience a job loss.
ARM or fixed rate?
Borrowers with adjustable-rate mortgages or interest-only loans should consider the potential benefit of switching to a fixed-rate loan. Hsieh says all borrowers with ARMs should switch to a fixed-rate loan unless they intend to move within one year.
However, Cunningham says some borrowers can benefit by sticking with their current ARM.
"Consumers with a subprime ARM should definitely switch to a new loan,"Cunningham says. "But some with conventional ARMs may find that they are in a good loan and that their rates are actually dropping."
While new loans today rarely have a prepayment penalty, many homeowners still have loans with that restriction, which could reduce the financial gain of a refinance, Meshel says.
Is it worth it?
Mortgage professionals generally tell borrowers to expect a home refinance to cost 3 to 6 percent of the loan amount. A simple calculation shows how long it will take to reach the break-even point when the savings outweigh the costs.
"If the break-even is at 15 months and you plan to stay in the home for five years or longer, it is probably worth it to refinance,"Cunningham says. "But if you plan to move in two years, it may not make sense."
Meshel says long-term homeowners who are close to paying off their mortgages might not want to refinance because of the costs incurred.