Recession Information Center | Recession tips

Recession Info Center

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Recession tips: Refinancing

It's common knowledge that the rates have fallen substantially during the ongoing recession.
At rates below 5.5% on a 30-year fixed-rate mortgage, mortgage rates haven't been this low
in nearly 40 years and that has made many homeowners think of refinancing. The following
is a non-exhaustive list of things you should consider in your case. The recession
information below and the tips are particularly helpful during recession.

Falling prices: The ongoing fall of home values during the current recession affect
many people's equity and refinancing decisions, which means if this trend continues,
some of the people who can refinance today might not have that option a year from
now. This is primarily because one's equity is a major determinant of whether you
can refinance. Generally, as your equity goes down, rates tend to rise and generally
terms get more strict. At extreme, if you owe more on your house than its value,
you have very few options.

Refinancing Costs: Remember that refinancing has its own costs (usually
anywhere between 2-4% of the loan amount). In many cases, particularly if you do
not plan to stay in your home long enough to recover its costs, refinancing may not
be ideal for you, especially during the current recession. Also, if you have an ARM,
the math is much more complex and it is highly advisable to talk to your financial
adviser before deciding on refinancing during the ongoing recession.

Strict Standards: Generally, people looking to refinance their mortgages in the
current recession are likely to face tougher lending standards than any time in recent
history. In many cases, lenders ask for documentation for the last 2-3 years on
income and reserves. Many apply the traditional rule that housing expenses shouldn't
exceed 28% of monthly pretax household income, and most require owners to have
at least 10% equity in the home.

Jumbo Loans: In the current recessionary environment, there is simply less
opportunity for those with jumbo loans and those available are not as attractive.

Finally, as always, contact objective professional advisors.