Refinancing Tips From the Front Lines of the Mortgage Mess

In the past when rates were higher, many homebuyers went for adjustable rate mortgages. But now, with the market in free fall, lenders say homeowners are looking for stability. Exotic mortgages are out. Borrowers are opting for traditional fixed rate loans.

"A lot of people want to get in to more stable mortgages, 30-year fixed mortgages," said Kantrowitz.

"People who have adjustable rates, if they are going to live in the house for a year or two, might consider staying with them because chances are they are adjusting to very low rates today, Moscowitz said. "If they are going to live in the house long term -- five, 10, 15 years -- they should consider locking in a fixed rate."

5. Choose the Length of the Loan

If a fixed-rate loan is chosen, then a decision has to be made on how long that loan should run. Thirty, 20 or 15 years?

Orman says that if homeowners can afford the shortest length, they should go for it.

"If you have a 30-year fixed at, let's say, 6.5 percent interest rate and you could refinance to a 15-year fixed at 4.5 percent or so, you should do it immediately," Orman says. "Please know, if you can afford a 15-year fixed-rate mortgage, interest rates on 15-year mortgages are usually half a percent less than a 30-year. So if you can afford a 15, go for it."

6. Pay for Closing Costs

Refinancing that loan is going to cost money up front, with the appraisal fee, title fees and various other closing costs. How should those be paid? Many mortgage bankers suggest folding those costs into the loan. Orman says no.

"I think you'll kind of be shocked to find out that if you don't have the closing costs up front and all of you may find with that additional money rolled into the loan, hey, maybe you're paying as much as you would have been paying if you'd never refinanced," Orman said. "I think you should only refinance, really, if you have the money up front to pay the closing costs and not roll them in."

Moskowitz warns that it's important to know exactly what is being spent well before closing.

"The most important thing is to get accurate, precise closing costs," he said. And if the numbers aren't what were expected when arrving at the settlement, then don't close, he says.

7. Think Twice Before Taking Cash Out

This was our experts' biggest area of disagreement. Moskowitz says if there is plenty of equity and big bills coming up, it's fine to take a cash-out refinance.

"I don't think people should take money out to live high on," he says. He suggests if six months of living expenses is needed in case a boiler breaks, or if a higher-interest credit card needs to be paid, it may make sense to get that money out and keep it in the bank. But only if the owner is disciplined enough not to fritter it away.

"We're not looking for you to go on a cruise or buy a new car with the loan," Kantrowitz said, "but if you can pay off and reduce your monthly obligations, that's a good objective to achieve."

But Orman says that could be "one of the biggest mistakes you will ever make."

"Why? Because if you lose your job and you can't make the payments on your home, you're going to lose your home," she said. "If you can't make your payments on credit cards, what can they do to you? They can't take your home. Yes, they can sue you and if they win they can put a lien on your home for when you sell it they can get their money back. But they can't take your home."

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