How to tell whether now is the time to refinance

It may be unwise or difficult to refinance if ...
Your interest rate on a fixed loan is below 6 percent or you plan to move soon. Many lenders say closing costs related to a refinance aren’t worth it if you’re shaving less than 50 basis points (0.5 percent) off your current interest rate, or 25 basis points with no closing fees.

Planning to move? That makes refinancing a tough call. Even if you lower monthly payments, those savings may not offset by the closing costs required for a new loan. Your lender may offer a rate modification—a lowering of interest rate without a full refinancing. Borrowers with mortgages at ING Direct, for instance, can pursue a rate modification to ING’s lowest available rate for free or a maximum $500 fee (depending on timing of your refinance) says Bill Higgins, chief lending officer at the Delaware-based online bank.

Your credit score is below 650 or your credit report has blemishes. Unless you’re eligible for an FHA loan, a low credit score means you may not get a favorable rate without substantial equity or other offsets. Refinancing options exist for borrowers with lower credit scores, but they come with price penalties that may not be worth it, such as a requirement to buy mortgage insurance, says Quicken’s Walters.

You have less than 10 percent equity in your home. Whether you used a low down payment to purchase or live in a market where home prices have fallen (taking some of your home equity), chances are you’ll have a tough time finding a refinancing situation that makes sense—or where you don’t have to bring extra cash to closing to create the equity required for the deal. FHA loans are an option, but eligibility depends on your home’s value relative to median market values.

You live in a “declining market.” Lenders have designated many areas of the country “declining markets” for risk purposes, meaning if you choose to buy in such an area (think Florida or California) your refinanced mortgage will require a down payment that’s higher than the lender’s normal minimum requirement—for instance, 15 percent vs. the usual 10 percent. When refinancing in a declining market, your may need to bring prohibitively large sums of cash to closing to “buy up” a minimum level of equity in your home and get your new loan approved.

You’re self-employed or want to pursue a “stated income” or “no-doc” loan. So-called “stated income” or “no-doc” loans grew popular with self-employed folks during the housing boom. It’s possible to refinance out of a stated-income loan to a regular product now, but forget securing a new stated-income loan. Self-employed workers now must provide extensive documentation.

You’re facing foreclosure. If you’re over 30 days late on mortgage payments, you’ve kick-started the foreclosure process and are technically in pre-foreclosure; if you’re more than 90 days late, you’re definitely in foreclosure. Late payments rob you of the power to refinance, but you may be able to get a “workout” with your lender in which you amend loan terms temporarily or permanently so you can get (and stay) current on your mortgage.

Don't miss this on MSNBC.com Tiny carp nibble your toes in fishy pedicure When the Dumpster is also the pantry Tune in to the joy of TV's guilty pleasures Is the truth out there? Real-life 'X-Files' Coming to America — for a great currency rate

MORE FROM PERSONAL FINANCE

Personal finance Section Front

10 Tips: Furniture shopping on the cheap Social Security unveils new earnings calculator Answer Desk: How safe are banks? Senate panel hears about European tax havens Ugly economic times can lead to ugly divorces 10 Tips: Watch out for TV pitchmen Workers raiding retirement piggy bank Answer Desk: Time to tap U.S. oil reserves? What if your bank fails? 10 Tips: Stay cool and save money Personal finance Section Front   Add Personal finance headlines to your news reader: