Four Refinancing Tips for a Tight Market

Thanks to poor lending practices, the subprime crisis has changed the mortgage landscape. Homeowners are now left with a new-but still viable- refinancing market.

Any borrower who hopes the market will return to "normal" needs a reality check. The recent subprime crisis and shrinking home values are pretty good indicators that the recent market has been anything but normal.

For the last five or six years, home values were over-inflated, lenders were overly generous, and borrowers were borrowing more than they could afford to pay back. The fallout has been a rash of defaults and declining home values.

This phenomenon, known in some quarters as a "market correction," doesn't mean that the mortgage refinance world is dead and buried. Far from it. You can still get a refinance on your mortgage loan, but you'll need to play by a new-or, this case, old-set of rules, in order to qualify.

1. Up with down payments

Down payments are back in style, especially for subprime loans. There are still plenty of zero-percent down first-time homebuyer programs, but lenders have tightened the screws when it comes to bad credit loans. Equity is now the name of the game; without it, a lender is far less likely to touch a borrower with a shaky credit history. Make sure that you've got some sort of down payment if you're considering a refinance.

2. Subprime borrowers will have to wait

There's been a great deal of speculation about the future of subprime lending. Count on these loans to resurface once again when home values start increasing. The subprime market remains a risky, but very profitable, field for lenders. The ones with the financial resources to wait out the current decline will be happy to jump back into the fray once market conditions improve. If you're a subprime borrower, however, you're going to have to sit tight until that day arrives.

3. Pre-qualify your lender

These days, you need to scrutinize a lender just as closely as they scrutinize you. With so many lenders going belly-up because of the subprime crisis, you need to make sure that your lender will be around for the long haul. Do your research and be certain that you're going with an established financial lending institution that has deep pockets and can ride out any slump.

4. Fixed-rate back in fashion

If the subprime fallout has taught us anything, it's that a fixed-rate loan is worth its weight in gold- especially because rates are at such historic lows. With market values unstable, choosing a fixed-rate loan that guarantees that your rate won't skyrocket when it adjusts will guarantee you a better night's sleep.

These tips probably are a departure from how people have approached mortgages during the last few years; but they're not overkill. If anything, they're a throwback to the more prudent ways of the past. Considering the recent problems in the market, they'll probably be a permanent part of the mortgage world's future.