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"When Decima Cooper purchased her first home, near Dallas, in 2004, she anticipated selling the property for a profit in five years. Unfortunately, the recession erased that option. &amp;quot;Now I&amp;#039;m considering refinancing,&amp;quot; said Cooper last fall. A lower monthly payment would eliminate her credit card debt and maybe even let her redo the kitchen to improve the home&amp;#039;s value. But since she&amp;#039;d like to revisit selling in a few years (presumably, when the economy has improved), Cooper wasn&amp;#039;t sure the math would work in her favor; she had a low 5.29 percent rate on a 30-year fixed mortgage. What to do? Cooper isn&amp;#039;t the only one crunching the numbers these days. Refinancing accounted for roughly 66 percent of mortgage applications in early October, says the Mortgage Bankers Association, no doubt driven by homeowners&amp;#039; urge to nab those &amp;quot;historic lows&amp;quot; on rates and lower their bills. The credit crunch has made banks more selective about who is eligible. &amp;quot;But there&amp;#039;s still some opportunity, especially if you have good credit,&amp;quot; says Joe Spada, a certified financial planner based in Parsippany, NJ.      That said, refinancing costs you time and money. You&amp;#039;ll most likely benefit from it if:  1. You can lower your rate by half a point or more  As a general rule of thumb, it&amp;#039;s worth looking into refinancing if the going rate is 0.50 percent lower than your current mortgage if you plan to stay in your home, says Timothy McFarlin, a real estate lawyer based in Irvine, CA. For example, someone five years into a $200,000, 30-year loan at 6 percent could cut her monthly payment $125 by refinancing at 5.5 percent. Which shouldn&amp;#039;t be too hard; 30-year mortgage rates have hovered between 5 and 5.5 percent for months now, and dipped below the 5-percent mark at press time.  The catch: The cost to refinance, including points and closing costs, can amount to 2 percent to 4 percent of the new loan&amp;#039;s value, eating into savings. Many consumers these days will need at least a 1 percent difference in rate to truly come out ahead, says McFarlin. Banks are also employing stricter credit and equity requirements for borrowers to earn their best rates in the tightening market, which means you&amp;#039;ll want to shop around extensively to see which has the best offer. Check with the bank that currently holds the mortgage; it may well offer no-fee refinancing in the hope of keeping your business. Also be sure to approach community banks and credit unions \u2014 they traditionally offer lower rates than big-name chains. Compare at bankrate.com and hsh.com. (Incidentally, Cooper is planning to sit tight with her existing loan \u2014 she can&amp;#039;t find a rate low enough to justify the energy and money required to refinance.) 2. You need extra cash  It had become standard practice for families to tap their homes&amp;#039; value via home equity loans to pay off debts or fund college tuition. Now, however, as home prices have plunged, banks have become increasingly reluctant to let homeowners borrow this way, even freezing or closing existing lines of credit. But people with a lot of equity can achieve the same liquidity through easier-to-access cash-out refinancing. The application process is the same as for a regular refinance, but the new loan will be for more than the borrower currently owes, so she can pocket the difference. Someone who owes $90,000 on a $200,000 mortgage, for example, could refinance for $120,000 and walk away with $30,000 in cash. When you sell your home, the cash-out is considered part of the profit, generally taxable only in excess of $500,000 for a married couple filing jointly. There&amp;#039;s a limit, however, to how much cash you can squeeze out through refinancing. Banks typically want to retain at least 30 percent equity in the new loan, says Spada, meaning you can borrow up to 70 percent of your home&amp;#039;s current value. You may also pay higher fees at closing \u2014 from 0.25 percent to 3 percent, depending on how much cash you take. Ask about those restrictions and charges while shopping around. Don&amp;#039;t be shy about mentioning how you plan to use the cash, advises Spada. Lenders may offer sweeter terms for borrowers who are remodeling (which increases the home&amp;#039;s value) or paying off high-interest debt (which can be perceived as reducing their risk as borrowers). 3. Your adjustable-rate mortgage is resetting before you plan to sell  As the economy recovers, interest rates have nowhere to go but up. With that in mind, homeowners with adjustable-rate mortgages may want to refinance into fixed loans sooner rather than later, says Richard Salmen, president of the Financial Planning Association. That&amp;#039;s especially true for folks with excellent credit who took advantage of easy-to-obtain financing to get bigger mortgages than their income qualified them for. (Wondering if you fall into that category? It includes anyone with a mortgage payment and other monthly debt obligations, such as a car loan or credit card bills, that amount to more than 40 percent of his take-home pay.)  Over the short term, you may miss a year at a low interest rate, because some ARMs are resetting at less than 5 percent. But by refinancing, you could save thousands over the life of your loan as rates climb \u2014 and lock in affordable monthly mortgage payments. The only folks with adjustable-rate mortgages who should not reset are those who plan to sell their homes before their loans reset to a rate above today&amp;#039;s averages, says Spada. But there&amp;#039;s one time you definitely shouldn&amp;#039;t refinance: if you might sell your home in the next two years. &amp;quot;If you&amp;#039;re planning on moving in the near term, you&amp;#039;re wasting money by refinancing,&amp;quot; says Salmen. The goal is to stay put until the monthly savings from your new lower payment have more than offset refinancing fees paid. If a lender charges $1,500 for a new mortgage that would cut your monthly bill by $100, for example, you shouldn&amp;#039;t move for at least 15 months. Ideally, you&amp;#039;d want to stay longer to actually save some cash and profit on the transaction. So be cautious about accepting refinancing terms that won&amp;#039;t allow you to break even within two years, warns Salmen. &amp;quot;Most people move a lot more often than they think,&amp;quot; he says. And in this economy, you never know when you might need to sell your home to secure a new job elsewhere or cut costs still further.  To get the green light, you&amp;#039;ll need a credit score of 600 or even 700 and up on the 300- to 850-point scale that measures how well you manage your debt (the national median is about 720). Also, you&amp;#039;ll need a good debt-to-income ratio, and the more equity you have in your home, the better \u2014 meaning your mortgage will ideally be less than 70 to 80 percent of your home&amp;#039;s value. However, the federal government has pushed lenders to refinance mortgages underwritten by Fannie Mae and Freddie Mac even when the owner owes 25 percent more than the home&amp;#039;s value. So if your home is mortgaged for $250,000 but is now worth only $200,000 due to slumping real estate prices, you may be eligible for a new loan. "^^<http://www.w3.org/2001/XMLSchema#string>
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