Ready, Set, Go: Three Steps for Getting a Jump on the Refinance Opportunity

A newly-announced Federal Reserve program has sparked a dramatic drop in mortgage rates. This represents a rare refinance opportunity that many homeowners should jump on without delay.

The Federal Reserve announced that it would buy up $600 billion in mortgage-related debt, sending 30-year mortgage rates well below the 6.0% mark. This means many home owners could now obtain a lower refinance rate. If you have a mortgage, you should rev up that refinance calculator and see if you can benefit from this opportunity.

Rare Refinance Opportunity

Mortgage rates have fallen by nearly a full percentage point since mid-October. That is an unusually steep drop, but more significantly, it brings mortgage rates down toward the lower end of their historical range. Based on 30-year mortgage rate data which is available from 1971 onward, mortgage rates have ranged between 5.23% and 18.45%, so rates under 6% are clearly toward the lower end of the range.

Indeed, forays below 6% are rare. In all the years for which mortgage data is available, 30-year mortgage rates have been below 6% for seven out of every one hundred months. This is why refinance rates may be especially attractive at this time.

Three Steps to Take Advantage of Refinance Rates

Of course, nothing is easy these days, and it may take some extra effort to take advantage of today's refinance rates. Here are three steps you need to take to improve your chances:

1. Refinance threshold. Use a refinance calculator to figure out your refinance threshold--the level of refinance rates necessary for you to still benefit, after factoring in closing costs and other expenses. The dramatic drop in refinance rates is certainly good news, but it is also a sign of the times. This is an extraordinarily volatile period for finance and the economy, and just as refinance rates could take a sudden drop, they are also susceptible to shocks which could drive them quickly higher. In other words, expect interest rates to continue to jump around while you pursue refinancing. Figuring out a refinance threshold in advance will make it easier for you to focus on what you need to do, without having to recalculate with every rate change.
2. Pre-qualify yourself. You can do a quick reality check to see if you are likely to qualify for refinancing. After all, the Federal Reserve's action may have given lenders more confidence, but they are still going to shy away from people with poor credit histories, and they are not going to write a mortgage for more than a house is worth in today's market. Checking your credit rating and comparing your home's estimated value against your mortgage balance will identify potential trouble spots. If you see any obstacles, consider whether there are solutions, such as taking steps to improve your credit rating, or paying down part of your mortgage to get the balance down below your home's value.
3. Use online resources. Many lenders have cut back on personnel, and are overwhelmed dealing with problem loans. The sudden drop in rates is going to create a rush to refinance that will stretch lender personnel even further. Using online resources can help you not only compare rates, but also find lenders who have the capacity to field applications in a timely manner.

Advance preparation for your refinance is crucial in today's volatile financial markets. Knowing your target rate, your qualifications, and working with a capable lender can help you pull the trigger on your refinance when conditions are right.

Sources:

• Freddie Mac

About the Author:
Richard Barrington has been a businessman and writer for a quarter century. Shortly after graduating Magna Cum Laude from St. John Fisher College in 1983, Richard joined Manning & Napier Advisors, Inc., a Registered Investment Advisor. Starting in an entry-level operations position, he worked his way up to become head of marketing and client service, an owner of the firm, and a member of its governing Executive Committee. His efforts contributed to the firms growth from slightly over $1 billion in assets under management when he joined, to over $12 billion in 2006. While at Manning & Napier, Richard earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the CFA Institute").

In August, 2006, Richard retired from the investment business to pursue a writing career. He has worked primarily as a freelance writer on a variety of business topics, while also writing manuscripts for three books.