Why Is The Time To Refinance now?

This post contributed by Rajiv Sanghvi.

Even if your loan isn't going to reset in the near future, there are good reasons not to wait. Declining home values eat into your equity, making it harder to get a new loan.

Rates on 2 million mortgages are scheduled to rise by the end of 2008. If yours is one of them, consider refinancing now -- if you still can.

Falling home values are eroding people's equity rapidly enough to the point that a favorable refinance may not be possible soon. Even some who have plenty of equity now will face limited options and higher costs in the coming months.

The reason is the 'refinance math' lenders do depends on how much equity you have in your home. More than 212 lenders have stopped lending altogether (www.mortgageimplode.com) and have ceased to exist since the last quarter in 2006. A recent casualty was National City Mortgage (12/31/07) on the wholesale lending side. Think these simple facts through:

• If your mortgage and other home loans equal 80% or less of your home's worth, you'll typically have the most choices and be offered the best rates, contingent on your credit scores and the loan amount being under $417,000.
• As your equity shrinks, though, rates tend to get higher and terms get stricter. Every time you slip over an equity benchmark -- 85%, 90% and 95% -- rates tick up and your options decrease.
• Once you owe more on your house than it's worth, your alternatives pretty much none, at least in today's mortgage market. Lenders who were once eager to make 100% or more loan-to-value mortgages have either exited the business or turned away from these high-risk loans.

Risk is in the waiting, not acting
Recently, only those who had to worry about not having adequate equity were those who purchased with zero or little money down. Even that was a temporary situation, as ever-rising home values continued to supply more equity.

Now that home prices are dropping in many areas, due to the foreclosures on the rise and excess inventory, the easy equity gains have turned into equity erosion. Someone with a $400,000 mortgage would have an 80% loan-to-value on a home worth $500,000, but if that home drops 10% in value, to $450,000, the same loan now represents about+/- 89% of the home's value. At this point the rates are usually higher or you may need to take out a second mortgage which is at a higher rate. This is usually done to avoid PMI or private mortgage insurance.

If you should be refinancing and are sitting on the sidelines, waiting for lower rates. That might be a gamble worth taking if real-estate values are still strong in your area and the supply of unsold homes isn't building. As prices in major markets continue to decline and there's more than a six-month supply of homes on the market, common sense says to refinance now as 30 year mortgage rates are at their lowest rates in recent years. Especially if you are currently have an Adjustable Rate Mortgage that will expire in the next year or two.

Also debt consolidation has its advantages as once you pay off your credit cards/loans with a home mortgage the effective rate drops and your interest paid is usually tax deductible. Taking equity out of your home in terms of, 'cash out' is beneficial if you will invest those funds at a higher rate of return than you are borrowing. Ideal scenarios are education or other investment opportunities that net you a higher return. Some purchased luxury or high ticket items and deducted the interest on their taxes.

Raj Sanghvi has been a licensed real estate professional since 1989 and has been in the mortgage lending industry for over 11 years. Contact: aofloans@gmail.com or call 800-950-6452. He is a mortgage banker and can lend in 23 states across the USA. Raj is also Host/Producer of Swar Bahar Radio Program which can be heard every Sunday from 11.00 AM to 12.00 noon on WNZK 690 AM and also at www.wnzk.com .