Low mortgage rates offer opportunity for refinancing


Are you among the lucky homeowners who still have substantial equity in your property and a stable job, but are short on cash for crucial expenses? If so, now may be a prudent time to refinance your mortgage and take cash out.

"Mortgage rates have fallen to historic lows. So for many people, borrowing against their home might be a wise option. All the interest charges on your larger mortgage are probably tax deductible," says Eric Tyson, a personal finance expert and co-author of "Mortgages for Dummies."

However, during real estate's recent boom years, many homeowners tapped equity in their properties based on what turned out to be inflated real estate valuations. Now they're suffering with mortgage balances that exceed the true worth of their properties.

But it's much less likely that you could get in the same fix nowadays, given that property values have moderated in many areas and the real estate appraisers are currently very conservative in assessing the worth of homes.


Tyson cautions against borrowing against your home for any ephemeral wants or needs, such as a dream vacation. But he contends there are several good reasons that could justify tapping your equity during this period of unusually low mortgage rates, such as paying for your child's education or infusing funds into a small business that is successful.

If you are considering a cash-out refinance and know you have the income to cover larger monthly payments, these tips could prove useful:

o Give yourself a financial checkup.

Clearly, lenders are much more risk averse when it comes to making loans than in the past. They'll want to see strong income (preferably on a W-2 statement) balanced against a low level of personal debt. They also want essentially good credit.

Before you shop for the right lender, Tyson says it's smart to review your credit history. Under federal law, you're entitled every year to one free credit report from each of the three large credit bureaus: Equifax, Experian and TransUnion. To obtain these, just go to

To know if you qualify for the best available mortgage rates, you'll also want to access your credit scores. Such scores, which draw on data from the credit bureaus, provide lenders with a quantitative measure of a person's credit risk. Most lenders use FICO scores, pioneered by the Fair Isaac Corp.

Usually you need to pay a fee to obtain your credit scores. One approach is to buy these through Fair Isaac's Web site: You can also receive credit scores through the credit bureaus.

The most important reason to examine your credit before shopping for a mortgage lender is that this will spare the lending institutions the need to run their own credit checks on you, which could potentially cost you points on your FICO score. Then, only the lender you ultimately select will then need a firsthand review of your credit.

o Exercise caution when considering use of an online lender.

While Tyson says it's not impossible to find online lenders who offer both good rates and excellent service, he urges you to be careful if you choose this avenue to refinance, because some only communicate through e-mail.

"This can be very limiting if you have questions or run into complications," he says.

Another possible issue, according to Tyson, is that any out-of-town lender, whether online or not, "who doesn't catch the nuances of your marketplace, could appraise your property for less than it's worth, making it tough for you to do the cash-out refinance you're seeking."

o Look to local real estate agents for advice on lenders.

Seasoned real estate agents in your community can be very helpful in suggesting the names of good mortgage lenders.

But you need to ask questions about the names given to you by an agent, says Leo Berard, charter president of the National Association of Exclusive Buyer Agents ( For instance, you'll want to know if the lenders were recommended on the basis of their low rates or smooth customer service, or both. You shouldn't have to sacrifice either.

o Branch out to various business professionals for referrals.

Given the turmoil in the real estate industry, many players have dropped out, including a number of mortgage lending firms that focused on subprime borrowers, including those with low FICO scores or severely tarnished credit.

But, as Tyson points out, you can still find many reputable lending firms that have survived. He recommends identifying these long-term players through accountants or lawyers in your area. You can also ask neighbors, friends or colleagues.

He says you may also want to call credit unions in your area. These are not-for-profit financial cooperatives owned by their members. If you don't already have access to a credit union through your workplace, you can likely find one that's open to anyone in your geographical area. One way to do this is by visiting the Credit Union National Association's Web site at

o Act while the rates are still relatively low.

With mortgage rates so low right now, Tyson questions the wisdom of waiting to see if rates continue to fall, considering that conflicting trends in the current economic picture might send rates in a steep upward direction.

"Whether or not you do a cash-out refinance now should depend on two factors: your current mortgage rate and your alternative sources of cash, if any," he says. "Should you decide to act, I would do so soon."

To contact Ellen James Martin, e-mail her at

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