If you'd like to take advantage of the low mortgage refinance rates available as a result of the mortgage crisis, there are some hoops that you're going to need to jump through to save a little money.

Mortgage rates have dropped in recent weeks as our government takes tentative steps forward on measures to heal the housing market. This means that the opportunity to save money by refinancing may have finally arrived. Don't pop the champagne bottle just yet, though. The existence of an ongoing mortgage crisis requires that you have a solid refinance strategy to ensure that you get that loan approval, and that you don't spend more than you should in closing costs.

Plan for a long process

Lenders are ultra cautious about giving approvals for new mortgage refinances right now. Assuming that you have a strong credit history and measurable home equity, this shouldn't keep you from obtaining a refinance approval. But it might keep you from obtaining it quickly. Expect your lender to ask for documentation on every number listed on your mortgage refinance application. Prepare by having your bank statements, pay stubs, and tax returns organized and accessible.

Also, consider processing time when locking in your interest rate. You don't want to lock in a rate for 45 days, just to see your low rate expire before your loan is ready to fund. Ask your broker for guidance on this aspect of your refinance strategy.

Compare no-fee rates

A traditional mortgage refinance has upfront closing costs, which you pay for out of your pocket. A second option is the no-fee loan, which has a higher interest rate but no upfront, out-of-pocket costs. When the no-fee loan rate is lower than what you're paying currently, this might be the right choice-particularly if you don't know how long you want to keep the home. The drawback is that the rate differential between traditional mortgage refinances and no-fee loans is relatively large right now-another outcome of the mortgage crisis.

Compare these two options in terms of total interest costs and your willingness to pull money out of your savings account. In that light, the right choice will probably be obvious.

Calculate refinance breakeven point

If you choose to pay closing costs upfront, calculating your refinance breakeven point is a critical step in developing your refinance strategy. That's because you don't save a dime on the refinance until you're fully reimbursed for those closing costs, by way of the lower monthly payment. Say you have to cover $2,000 in closing costs to lower your payment by $100; your refinance breakeven is 20 months. If you sell or refinance again prior to that breakeven point, you'll have lost money on the deal.

A mortgage refinance can save you money if you have a plan. If you don't, it may not save you anything and, worse, the whole process may be stressful. So be smart, and proceed with care.

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Published on March 24, 2009