Letter to the Lender: We were recently shopping for a home refinance loan online and we received a handful of mortgage quotes.  Obviously we want the lowest mortgage refinance rates possible.  We also want a fixed interest rate on a 30-year term and if we can qualify for a no cost refinance mortgage that would be another benefit.  One of the lenders offered us a FHA refinance at 5% fixed on a 30-year term with no points and no fees.  Another lender offered us a FHA loan at 4.875% on a 30-year term with no points, but there is $3,000 in closing cost that we would either have to pay out of pocket or we could roll into the loan.  Which option do you think we should go with?  Is no cost mortgage refinancing always the best choice when shopping for a mortgage loan? Do you think we should wait for refinance rates to drop more?

First of all, if you have the opportunity to save money with a fixed rate while interest rates are at all-time lows, you should jump for the opportunity and move forward.  Although mortgage interest rates are extremely low today, it is very difficult to qualify for mortgage refinancing, because lenders have tightened guidelines significantly in an effort to minimize loan defaults and foreclosures.  Just because you qualify today does not always mean that you will qualify to refinance tomorrow.  For example, What if you are approved for a FHA mortgage at 96% loan-to-value now and FHA changes the guidelines to 95%?  What if there were several foreclosures on your street that brings your value down so that your loan to value balloons to over 100%?  These are both real reason why borrowers don’t qualify for a refinance loan that they once were approved for.

To answer your second question, I must understand your big picture first.
1. Do you plan on selling your home or moving any time soon? No, we would like to retire in this home.
2. What is the balance on your first mortgage? $385,000
3. What is your home’s appraised value? $495,000
4. Do you have a second mortgage and if so did you want to refinance the second mortgage with the new loan? No second mortgage
5. Have the lenders ran your credit and sent you loan disclosures with a Good Faith Estimate? Yes, we have 739 middle fico score and believe it or not we received loan disclosures from both loan companies.

Lender Recommendation: First of all I would recommend rather than going straight for a FHA loan that you get a quote for a conventional mortgage backed by Fannie Mae or Freddie Mac. FHA loans are great but you are below 78% LTV and you qualify for a prime rate loan with no mortgage insurance.  Unless you get a 15-year loan, FHA guidelines requires that you pay a mortgage insurance premium when you close the loan, in addition to a monthly insurance charge.  In your case that would save you over $100 a month by choosing a loan backed by Fannie or Freddie.  Regarding which refinance option to choose — While the no cost mortgage refinance is appealing but if you keep this loan for the life of the term you would save money by paying the $3,000 in closing cost and go with the lower rate option.  These are great refinance options and you could not go wrong with either mortgage loan.  Mortgage refinance rates are at record lows so the chances of interest rates improving are slim.  It certainly is not worth the risk of refinance rates rising, because there will be a time when they go up and do not come down…