RE-FINANCE YOUR MORTGAGE! Is the Time Right . . . NOW?
NEW RULES ON REQUIRED HOME EQUITY, MINIMUM CREDIT SCORES, MAKE LOAN APPROVAL TOUGHER!
You've owned your home for several years, and have no plans to sell anytime soon. You've heard mortgage rates are down.
Is it the right time to refinance to a lower rate, and possibly lower your payments?
After the Fed took over giant loan investors and guarantors Fannie Mae and Freddie Mac several weeks ago, average mortgage rates responded by falling nearly 0.4%, almost immediately, in the Chicago area. They currently stand less than 6.00%, on average, for qualified borrowers.
For the week that ended September 12th, refinance loans accounted for over 50% of loan applications, compared to just over one-third a week earlier.
Several years ago, lenders would typically recommend re-fi if the owner lived in the property at least two years, planned to stay at least two more before selling and moving on, and the current interest rate was at least a two-percent improvement over the homeowner's current loan. Today, lenders suggest considering refinancing if the projected monthly savings is $100, and if break-even on closing costs (estimated as high as $2,000) can happen within one year.
Many lenders also suggest a shorter-term loan - 15 years versus the more common 30 year amortized loan - to save thousands of dollars in interest cost over the term of the loan.
Doing the math is only a part of the equation today, however.
For one thing, far tighter loan underwriting standards means it might not be as easy as you think to qualify for a new mortgage. Your FICO Credit Score often need be a minimum of 740 - considerably above average - to qualify for the best rates and terms.
Also, lenders are very closely scrutinizing property values on refinanced homes. Detailed appraisals are usually required - simple "drive by" or "desk" appraisals are rare. Appraisers' evaluations are now considering unsold homes nearby, as well as nearby short sales and foreclosed properties. Indeed, your own opinion of your home's value may be considerably higher than the figure the professional appraiser arrives at.
During housing boom times, many refinancing homeowners took cash out with their re-fi loans, to fund everything from home improvements, to vacations, to start-up businesses. Approval for cash out loans today is rare, as banks are wary of these equity-depleting loans.
If you have less than 20% equity in your home, or are close to the 20% threshold, expect to pay Private Mortgage Insurance, which protects the lender should you default on your loan. As home values in some areas around Chicago continue to weaken, banks want to avoid losses should the market value of your home fall. PMI may add over $100 per month to a $250,000 mortgage loan payment, depending on the credit credentials of the borrower.
Which homeowners are the best candidates for re-fi today?
Generally, those who have owned their homes at minimum of three years have acceptable levels of home equity for refinancing, so long as their original down payments were sizable, and they have not refinanced within the past couple of years.
More recent purchasers - within the last two years or so - or those who have recently refinanced their mortgage, typically have little equity built up, due to the current declining market in many neighborhoods and suburbs. This is especially true for those who originally purchased with a low down payment. For some with low equity, current rates may actually be higher than your old mortgage interest rate, making refinancing a poor choice.
Read Mary Ellen Podmolik's article in last Friday's Chicago Tribune for more info.
DEAN MOSS & DEAN'S TEAM CHICAGO
