How to score a low-rate loan

In this bleak economy and stagnant, scary housing market, good news is harder to find than a zip code where home values are going up.

But if you plan to stay put in your home and have a decent credit score, one bright spot has been that falling interest rates means it’s a great time to refinance your mortgage, a move that could save you hundreds of dollars every month on your mortgage payment and over the long term, thousands of dollars.

Trouble is, like any good deal, not everyone can qualify. And with loads of people rushing to refinance, even homeowners with a decent credit score are finding out that it can take weeks, even months before a mortgage lender can process a refinancing for you. At least one frustrated homeowner in Denver wrote to me to say she had a nearly two-month wait to refinance from 5.875% to 4.875% on a 30-year fixed mortgage. That backlog ended up costing her nearly $1,000 in fees to hold onto the mortgage rate she and her husband thought they had secured with a 30-day lock back in mid-December.

So, what can you do to make sure you don’t miss out on your refinancing opportunity? First, know whether you can even qualify. Underwriting standards are super strict today, so you must have 20% to 25% equity in your home, a credit score of at least 750 and don't own a slew of investments properties to qualify for the best rates. Don’t get stuck paying for an appraisal and loan fees only to find out you aren’t eligible. According to Guy Cecala, publisher of Inside Mortgage Finance newsletter, transaction fees and points have come back in a big way, so you really need to shop around get the best deal. He suggests getting at least three quotes and running the numbers to make sure the cost of refinancing will pay off for you. Try a calculator like this one at CNNMoney.com. A general rule of thumb is that you need to cover all your closing costs with the savings from your refi within two years.

Start with your existing lender but call all the major institutions in your area as well as small mortgage brokers to weigh bids. Unfortunately, lenders are in the driver’s seat these days. But if you belong to a credit union that does mortgage loans, that could be the best option of all. Cecala says he knows two lawyers who recently were able to refinance their mortgages with their credit unions, snagging favorable rates and paying no junk transaction fees or points. It’s just another reason to love credit unions.

- Donna Rosato