Doing a mortgage refinance these days is tough, because lenders-including those doing FHA mortgages--want to see a higher credit score and more proof of assets and income. But they also don't want to refinance until home equity loans or second mortgages have been repaid.

Fixed mortgage rates are below 5.2 percent, the lowest they've been in 52 years. But between locking in that great rate and closing the transaction, most homeowners doing a mortgage refinance discover that the savings get lost in translation because of especially high fees and steep mortgage refinance hurdles. That often makes it too expensive to do a successful refinance, despite the allure of historically cheap rates or the urgent need to refinance out of a troublesome loan.

Credit score woes

Obtaining a mortgage refinance is a difficult process, even if you contribute a down payment of 20 percent (the industry standard in recent few months), and have a credit score in the low- to mid-700 range. The credit score will also be interpreted more narrowly, because scores that were borderline prior to the credit market collapse are now pushed down into a lower category that represents higher risk and less credit worthiness. Lenders want verifiable proof of income and assets, typically charge more points and fees, and won't hesitate to raise the interest rate for any borrower who doesn't meet or exceed their underwriting standards. What's even worse for many borrowers this year is that if the homeowner has a second mortgage-no matter how small the balance owed-it could put a halt to the whole process. Many attempts to refinance are dismissed as ineligible until the second mortgage is paid in full and the corresponding lien is removed.

Extra points not extra credit

But that's not all. Fannie Mae and Freddie Mac sometimes add a quarter-point fee they explain as an "adverse market delivery charge," based on the fact that they're lending during a time of declining home prices. They also utilize "risk-based pricing" which, in plain English, means that borrowers who have blemishes on their credit profile get charged more money. Expect to pay extra for a credit score that dips down into the 720 range for the purchase of a condo-since condominiums are losing value fast-or if the down payment is less than 15 percent. In other words, borrowers might qualify for a mortgage refinance at a great rate, but by the time the deal is done, they won't be getting a bargain at all.

The truth about FHA mortgages

Cash-poor borrowers have always gravitated toward FHA mortgage products, and that's especially true now. With an FHA mortgage, it's possible to pay as little as 3.5 percent down, but the interest rates are generally higher than they are for non-FHA mortgage loans.What's more, mortgage insurance premiums for an FHA mortgage run about 1.75 percent.

Before considering a mortgage refinance, crunch all the numbers and see if it's really worth it in the end.

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Published on April 28, 2009