Refi Freeze or Opportunity?

While mortgage rates are still hovering around 5% it would seem to be an ideal time to refinance your mortgage into a thirty year fixed rate home loan. Many mortgage brokers are reporting increased business this month compared to last year, with 3 of 4 prospects looking to refinance, yet new loans closed are not keeping pace.

According Frank Binetti, president of the Illinois Mortgage Bankers Association, applications for mortgage refinancing are up 75% compared to last year, but 40% won’t qualify for the new, lower rates. In the past, only 20% would have failed in their quest.

The trend is due to three major factors. The first is the decline in home values, which have rebounded of late but still leave about one in five across the country underwater on their mortgages.  Make sure you have enough equity in your home for a refinance. Most mortgage lenders today won’t consider one unless you have at least 20% equity. Here’s how to get an estimate of your home’s value. One home value depressant is the influence of short sales or foreclosures. Let’s say that there are dozens of homes in your subdivision and that one or two are on the market for $350,000, yet a couple have been sold at foreclosures or through short sales for $250,000. Bankers will now treat all comparable homes as being worth $250k whether or not any sellers would actually voluntarily part with their homes at that depressed price. If you bought your home seven years ago, you could still be okay with a refi, but if you purchased at the market’s peak in 2006, even with a substantial down payment, you’d be lucky to get refinancing today.

Given the fact that the entire mortgage crisis was precipitated by sub prime loans, which went to borrowers with less than stellar credit, lenders have tightened their requirements for higher FICO scores before offering new mortgages. Although the minimum credit score varies with the amount of equity and income, most people rated over 740 should still quality. It’s a good idea to get your score ahead of time to see where you stand. These steps will help raise your credit score.

Finally, the self-employed are getting squeezed out. Most lenders will no longer accept stated income loans. For anybody who is self employed, there is an open secret about net vs. gross income. Legitimately, someone who is working for herself can deduct a lot more than an employee on salary. For example, auto expenses for a commute are not deductible for an employee, yet all business travel, including driving to and from regular client meetings are considered write offs for the self employed. A room dedicated to research and correspondence can be a tax deduction as a home office to those who own their own businesses, but if your primary place of work is elsewhere as an employee, that desk space is as deductible as your kitchen. The differences go right down the line producing an odd situation where a self employed entrepreneur can live quite comfortably on a modest net income generated by a healthy gross income offset by major deductions. Yet by looking at the net income alone as shown in tax returns, it can seem as if the businessman is barely scraping by, unable to qualify for a home loan refinance.

Still if your credit is good, you have equity in your home, and you’re working as an employee you have a very good shot at a refi before the rates go back up. Here are some guidelines:

  • Most experts conclude that a refinancing is worth the effort and expense if you can save at least a full percentage point in interest over your current rate. As a rough estimate figure that a one point interest rate drop will reduce your payment by $65 a month for every $100,000 you borrow.
  • Remember that there are points and closing costs. Another good guideline is that you should be able to recoup those expenses through lower mortgage rates within the first two years of your new home loan. If your pay off  is projected to take longer, keep shopping for lower borrower fees.
  • Second mortgages are problematic. For a refinance on your first, the second mortgage has to be subordinated to the first. If possible, try to fold the second into your new lower rate mortgage a process which works easier if they’re from the same lender. If the second mortgagee is willing to subordinate the second loan, be prepared for a dramatically decreased credit line, which you should expect with a home equity line of credit.
  • Finally, cash out refinancing is proving to be a sticking point. I know one condo owner who is trying to do a comprehensive refinancing of all of his debt to free up some cash for a much needed bathroom repair. Researching the situation showed that in today’s market cash out cash out mortgage deals are harder to obtain. It’s easier to simply concentrate on getting that high interest or adjustable rate mortgage replaced by one locked in at a lower rate.

If you can qualify, it remains an excellent time to refinance. Mortgage rates are inching up and are poised to take a dramatic jump in March when the Federal Reserve Bank plans to stop buying mortgage backed securities.

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