AS MORTGAGE RATES FALL BACK, Home Refinancing Takes Off - But Borrowers More Cautious, Not Everyone Qualifies!
30-YEAR FIXED MORTGAGE RATES FALL BELOW 5.25% FOR SOME - LOWEST AVERAGE LEVELS SINCE 1971!
Average mortgage interest rates have fallen in recent weeks, as the Federal Reserve Board has brought down its benchmark Fed Funds Rate to historically-low levels. As a result, interest has been high in refinancing current home loans, with the goal of reducing monthly mortgage payments.
Last week, the Mortgage Bankers Association indicated the average new 30-Year Fixed Mortgage had an interest rate of 5.18% for the week ending December 12th – the lowest average rate since the Association began keeping records 37 years ago.
There is a bit of a different complexion to today’s rush to re-finance, however.
First of all, according to several lenders questioned, roughly one-third of all homeowners seeking to refinance fail to qualify, due to new, far tighter underwriting standards for loans.
In addition, today’s borrowers are proving a bit more cautious. Instead of immediately spending their new-found savings, many re-fi borrowers were simply looking to cut their monthly mortgage payments to save money.
One borrower from the Chicago Suburb of Libertyville IL estimates he will save $230 each month on his re-finance loan. He is switching from a 6.25% loan to one offering a fixed-thirty-year rate of 5.50%. “That’s going straight into the mattress,” said Ken Wasser.
Wasser refinanced now, rather than waiting for the possibility of even lower mortgage interest rates, over fears about his job. He works as a sales executive for a major computer hardware retailer. Although no layoffs have been officially announced at his employer, he knows that job cuts are indeed possible in today’s economy.
Purchasing his home near the peak of the Chicago Housing Market back in mid-2005, Wasser was able to re-finance today because his initially strong down payment.
Others, buying about the same time but with a lower down payment, will likely not be as fortunate. They might not have enough pent-up equity in their home to achieve the minimum 20% equity threshold many lenders require for their best rates.
Those with less than 20% equity can still find a refinance loan if their credit is strong, but rates here are higher, costly Private Mortgage Insurance is often required, and the added loan costs and fees, even if built into the new loan, reduce the attractiveness of re-financing.
Often times, even for those who purchased within the last few years with strong, 20%-plus down payments, recent declines in property values may have taken a bite out of home equity. A low appraisal can scuttle the new loan.
According to Steve Molitor of PHH Home Loans in the Chicago Suburb of Evanston IL, "The challenge right now is in the appraisals. If someone bought 1 1/2 years ago and put 20 % down, they may no longer have the equity. In many cases, I'm saying let's start with an appraisal. Prices are equivalent to where they were three years ago."
However, for those who qualify for re-finance, continued Molitor, the savings can be considerable. Re-financing from a 6.25% interest rate down to a 5.50% interest rate on a $400,000 mortgage can reduce payments by $192 each month – or about $2,300 annually!
Read more in Mary Ellen Podmolik’s story in today’s Chicago Tribune.
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