4 Ways to Land a Refinancing Deal

With mortgage rates hovering near a 50-year low, the question for many homeowners isn’t whether they should refinance, but whether they can refinance.

Not only do borrowers need a stellar credit score, a small debt-to-income ratio and at least 5% equity in their home just to get be considered for a mortgage these days, but they also need enough patience to see the deal all the way through. As rates started to plunge in November, a flood of homeowners began calling their lenders looking for a better deal.

“The industry is woefully unprepared for the cascade of new business that’s coming in right now,” says Keith Gumbinger, vice president of HSH Associates, the nation’s largest publisher of mortgage information.

To help you navigate these crowded waters and hunt down the best refinancing deal here are some steps you should take.

Many large, venerable mortgage lenders have disappeared in the last year. So try turning to smaller institutions, which are less capital-impaired and therefore more willing to lend -- and to offer better rates. While shopping around for rates, try small banks, small thrifts or credit unions first.

Sniffing out the lowest rate requires a combination of online research and good, old-fashioned phone skills. To get a basic handle on current rates, try Bankrate.com, which lists average and sample rates on a national, state and, in some cases, local level.

Also, check the web sites of some online mortgage brokers and lead generators, like E-Loan and Lending Tree. Keep in mind, however, that online mortgages still represent just a sliver of the overall mortgage business so it's important to call lenders in your marketplace directly and ask them about their available rates, says Gumbinger.

Just be sure to make those calls within a short amount of time -- ideally within two to three hours -- for an even comparison, says Gumbinger. And when asking for a quote, be specific. Tell the lender or broker what sort of fees you're willing to pay upfront, as well as the type of lock-in period – a signed agreement that reserves a rate while you close your mortgage -- you want. (Read our story for more information on mortgage fees.) 

"No-cost refis" may sound enticing, but like anything that claims to come at no cost they should be approached with skepticism. Sure, you don't have to pay out of pocket for the fees typically associated with these loans (such as the application fee, title search, credit check and appraisal), which can easily come to more than $1,000, but you’ll end up paying a higher long-term rate.

For most homeowners, a no-cost refi isn’t the way to go. Only when a borrower believes they will be in their home for a short period of time does it even start to make sense. For example, a homeowner with a $250,000 mortgage and $4,000 in closing costs would have to live in her home for about four-and-a-half years to recoup her upfront costs if she chose a 7.5% rate over an 8% no-cost refi. If she spent any less time in that home, then the no-cost refi would be the better way to go.

Also, watch out for "float down" options, which offers the option of locking in a lower rate should rates fall while they’re refinancing. The cost for the privilege? One-eighth of a percentage point on your interest rate, which means mortgage rates would have to fall at least one-quarter of a point to make the deal worthwhile.

“If you’re expecting to just pick up a phone and call a representative and get refinanced, you might not be the right customer for this type of market,” says Gumbinger, who estimates that there's about a 50% attrition rate for those seeking to refinance.

Also be prepared to jump once the opportunity strikes. Fully document your income and your assets. Know your debt loads, your cash on hand, how long you’re planning on staying in your current residence and how much equity is in your home. And make sure you’re up to date on the competitive rates in your market.

“Know your business,” advises Gumbinger, “Otherwise you’re going to be disappointed.”