Ilyce Glink

With mortage interest rates at record lows, you may be thinking about refinancing your mortgage. What should you do to prepare to refinance your mortgage?

It's important to know the current value of your home, your current mortgage loan interest rate, and your credit history and score. You should also run the numbers to see whether you can recoup your closing costs in a reasonable amount of time. And unlike during the housing bubble, you now need to provide lots of documentation, including proof of your income, when you want to refinance your mortgage loan.

8 Things You Should Do Before You Refinance Your Mortgage

With 30-year interest rates well below 5 percent, and 15-year interest rates between 4 percent and 4.5 percent, it’s time to start seriously thinking about refinancing your mortgage.

But before you high-tail it to the nearest mortgage lender and fill out a mortgage application, there are 8 things you should do:

1. Check out the interest rate you have on your current loan. When interest rates dip, the natural inclination is to start filling out loan applications left and right. But too many times, homeowners are focused solely on the new interest rate instead of how much they’ll save by refinancing. While you may get water cooler-bragging rights, you should only refinance if it’s going to save you money.

2. Find out how much your home is really worth. There’s no way to sugarcoat it: Home values have sunk around the country an average of about 20 percent in the past year. In some places, like Las Vegas, Miami, Phoenix and greater San Francisco area, the decline has been twice as steep. It’s vital to assess whether your home still has any equity (the difference between what you owe and what the home is worth) or if you are “under water” with your mortgage (meaning that you owe more to your lender than the property is worth). Whether you have equity will determine what kind of refinance is open to you.

3. If you’re underwater with your mortgage, assess how far underwater you are. While federal requirements have changed with regard to refinancing loans owned or serviced by Fannie Mae, Freddie Mac, or FHA, if your loan is more than 105 percent of the value of the property, you may not be able to refinance without bringing cash to the table. (You may still be eligible for a loan modification, however.)

4. Get a copy of your credit history and credit score. Since the credit crisis began, lenders have raised the credit scores required to get approved for the best loan programs and best interest rates. The best place to go for a copy of your credit history and credit score is AnnualCreditReport.com. It’s the only place where the three credit reporting bureaus provide a free copy of your credit history each year, plus you can pay $7.95 for a copy of your credit score. Choose the Equifax credit score, since it’s the one closest to the score used by most lenders. (You can also go to MyFico.com, and purchase your credit history and FICO score for $15.95. You may also find their online community to be helpful in terms of suggestions on how to raise your credit score.)

5. Start identifying potential lenders. Shopping around for a loan takes a little more planning and effort than it used to, as lenders have jacked up the fees they charge to underwrite and process the loan. Your best bet is to talk to a national lender, a credit union (if you belong to one or can join one), a local mortgage broker (call your real estate agent if you don’t know one and ask for several recommendations), and perhaps an online lender.

6. Find out if your second lender will subordinate to your first lender. If you have a first and a second mortgage (also known as a home equity loan), find out whether the second lender will subordinate to the new first lender. That will allow you to refinance your first mortgage, while leaving your second loan in place. Many second lenders will not agree to this, and if yours doesn’t, you may not be able to refinance at all unless you pay off the second loan. One possibility is to refinance your first mortgage with the lender who owns your second loan.

7. Focus on the big picture, not just the interest rate. While the interest rate you’d get is important, it’s also important to calculate how much you’d pay in fees, and how long it will take to pay yourself back the cost of the refinance with your monthly savings. For example, if you’re only going to save $50 per month, and it costs you $5,000 to refinance, it’ll take you 100 months, or more than 8 years to pay back the cost of doing the loan. You won’t start saving until well into the eighth year of paying down the mortgage. So, unless you’re cutting the term of the mortgage significantly (going from a 30-year to a 15-year), or you’re able to pay off the costs in a relatively short period of time (say, less than a year or 18 months), it may not pay to refinance.

8. Get your paperwork together ahead of time. Before the housing crisis, you could almost do a refinance over the phone. In fact, you could call the loan officer you worked with regularly and put in your order for a refinance. You could do a no-cost refinance without providing much in the way of proof of earnings, or account statements or copies of tax returns. The forms would be delivered to your home; you’d sign them and send them in. Today, you’ve got to have your paperwork in order before you can refinance. Gather together your W2, a current paycheck, copies of your last two federal and state tax returns, copies of your bank accounts, retirement accounts, and other assets. Then call the lender.

More Americans can afford to buy a $200,000 home, at least on paper.

The National Association of Home Builders announced today that 55 million families can afford a $200,000 home when you take into account their incomes, home prices and mortgage interest rates. That's up from about 38 million families two years ago.

Can you refinance your mortgage loan when you owe more on the property than it's current home value?

Your mortgage lender may be more likely to grant you a mortgage loan modification or refinance since the federal government has been offering mortgage lenders financial incentives. Learn how to request a mortgage loan modification from your mortgage lender. And read on to see what happend to one Think Glink reader.

Question: The interest rate on my loan just adjusted to 9.25 percent last month. We are upside down on our house by 5 percent, so we aren’t sure we can refinance. I’m trying to do a loan modification, but am being told that I have to be late on my mortgage or the lender won’t work with me.

I am now current and don’t want to miss a payment just so someone will help me. The loan modification company I’m working with wants to charge me a fee of $1,700. Will this save my house? Should I spend this money?

Answer: I have good news for you. The good news is that President Obama’s new mortgage refinance program should help you if your mortgage is only 105 percent of the value of your property.

For example, if your house is worth $100,000, and your primary loan is $105,000, you can refinance your home as long as you have the income to pay the new loan. The home must also be your primary residence.

Lenders will work with you on this program to lower your interest rate so that it is no more than 31 percent to 38 percent of your gross monthly income. The nice part about President Obama’s $75 billion loan program is that lenders and borrowers have an added financial incentive to keep paying these loans current.

Mortgage lenders will receive a “pay for success” fee of $1,000 for each eligible loan modification, plus additional fees of up to $1,000 per year (paid monthly) as long as the borrower pays on time. Homeowners will receive up to $5,000 (up to $1,000 per year for five years) to reduce the balance owed if they pay on time through these years.

The details of this plan were only announced in early March 2009. Please contact your lender as soon as possible. If your lender refuses to help, please call the Hope Now Hotline (toll-free 888-995-HOPE) and speak to a federally-certified housing counselor.

There are many credit and loan companies out there claiming that they can help borrowers for a fee. Be careful in dealing with these companies. If you pay them almost $2,000, you may not necessarily be getting the best deal. You should first work with your lender, call the Hope Now Hotline and talk to a housing counselor.

You need to become informed about your options. You may find that your current lender is now willing to talk to you. When you call your lender, ask to speak with their loan mitigation department, particularly if that wasn’t the department you were talking to. That department is the one that should be able to work with you on your issue. And, keep your $1,700 in your pocket for now.