Real Estate Matters: There's more than the rate to consider in a refinance

Mortgage interest rates below 5 percent, combined with the recent extension and expansion of the home-buyer tax credits, give buyers a unique opportunity to purchase a home. But if you have enough equity in your property, it may also be a great time to lock in a lower interest rate and refinance your loan's existing balance.

Here's how to think through a refinance:

-- Will you qualify? Before you put any time and energy into working out the details, assess your property's value. Contact a local real estate agent to discuss what homes in your neighborhood are selling for -- not what they're listed for. Find out whether there are a lot of foreclosures in your neighborhood, or just a few. Neighborhoods that are awash in foreclosures tend to have steeper price drops than those that have fewer homes for sale.

-- How much equity do you have? If you have at least 20 percent equity based on the current market value, then you should be able to do a conventional refinance. Today, conventional lenders won't do a refinance unless you have at least 20 percent equity in your property and have verifiable income. Federal Housing Administration backing is available for loans with less than a 20 percent down payment, and their guidelines differ somewhat from most Fannie Mae and Freddie Mac lenders, but these FHA loans are generally available for new purchases of homes and not for homeowners who want to refinance.

-- Can you qualify for "underwater" mortgage programs? If the value of your house is less than what you owe on the mortgage, then you are considered to be under water. If your loan is owned or securitized by Fannie Mae or Freddie Mac, you might be able to refinance even if you are under water. In some federal programs, you may be able to refinance even if the loan balance is 125 percent of what the house is worth.

-- What are you trying to accomplish? Some homeowners want to lower their monthly payments. Others want to shorten the loan term. Start by figuring out what your financial goals are, and then prioritize them.

-- Shop around. Although Fannie Mae, Freddie Mac and the FHA are collectively responsible for nearly 90 percent of the loans being originated, refinance fees vary widely. Ask prospective lenders to list every fee so you know what you'll be paying and what interest rate you'll be getting. If you belong to a credit union, or can join one, check out the interest rates and fees available there, since nonprofit credit unions often charge less than for-profit banks.

Remember, water-cooler bragging rights are meaningless. Instead of trying to get the lowest rate, focus instead on how many years you can chop off of your loan. If you have 25 years left but can refinance to a 15-year loan, that's where the real savings comes in.

I own a rental property that is worth less than the mortgage balance. What happens if I decide to sell? It is in Atlanta, and because of market conditions it will almost certainly be a short sale.

Will my lender send me a 1099 statement for the difference between what I owe and the amount the short sale generates? Do lenders usually send the 1099 even if the lender cancels the debt owed?

Real estate investors whose properties are worth less than the mortgage amount don't get to take advantage of the special protections and tax benefits that Congress has bestowed on homeowners who are in trouble with their primary residences.

When an owner sells a property through a short sale, the lender will send a 1099 for the difference between what was owed and the amount accepted on the loan.