Subprime meltdown changes home refinance climate
By Vicky Katz Whitaker
Copley News Service
When interest rates start to drop, financially savvy homeowners usually head straight for their banker or mortgage lender. They know the time may be ripe to refinance that higher interest rate fixed mortgage or renegotiate terms of an adjustable-rate mortgage.
But in the wake of the subprime meltdown and today's turbulent economy, it's gotten tougher to get what you want. Before approving refinancing, lenders are scrutinizing credit scores, the amount of equity that the homeowner has accrued, even employment and payment patterns.
What does this mean to you?
Plenty, if you're stuck with a high mortgage payment and a house that has taken a double-digit plunge in value over the past year. If you put nothing down when you bought your house, made a small down payment, or have little equity, you may find it impossible to take advantage of lower interest rates. If you have less than 5 percent equity in your home or a credit score below 680, you may not be able to qualify for refinancing or refinancing cash-out packages that in the past could have provided you with a lower mortgage rate and money over the value of your home to pay off credit cards, finance a major purchase, even pay for your child's education.
Even if you can find a lender willing to refinance your existing mortgage, a poor credit history and lack of equity could leave you facing additional fees and rates higher than what is offered to better credit risks. That could undermine any benefit derived from refinancing your mortgage now.
If you are in good financial shape, when does it make sense to seek refinancing?
When rates drop by one-half to one point, provided you stay in your home for at least five years to recoup the closing costs.
"In some cases, you may be able to do that in a year or two," says American Bankers Association spokesman John Hall. To really benefit, you need to keep your home long enough to pay the costs of the refinancing process, which can run several thousand dollars, depending on how much you borrow.
For a homeowner with an adjustable-rate mortgage and good credit, refinancing to a fixed-rate loan can guarantee that the interest rate will be fixed for the life of the loan. If you want to stick with an adjustable-rate mortgage, refinancing may let you negotiate for a better rate and payment cap than what you have now. By converting to a shorter-term loan, refinancing also can allow some homeowners to build up equity more quickly.
Mortgage experts offer these other suggestions:
- If you're thinking about refinancing, make the first stop the lending institution that gave you your existing mortgage. Since you have a track record with them and they with you, it can work to your advantage. But if you're not satisfied with the service or the package they are offering, shop around. "It's a very competitive market," the ABA's Hall points out.
- Don't have your property appraised in advance of sitting down with the lender. As a result of the problems with the subprime market and an almost nationwide dive in real estate values, financial institutions are less inclined to accept appraisals submitted by a property owner. Expect to pay for the services of an appraiser selected by the lender as part of the refinancing process.
- Don't seek cash-out mortgage refinancing to pay for intangibles like a vacation or a big-screen television set. Instead, use the money to make repairs or upgrades that add value to your home.
- A cash-out mortgage refinancing can be a lifesaver if you're deep in credit card debt. Use the money to pay off high-interest credit card bills. Just make sure that once those bills have been paid, you don't run up others.
- If you can't qualify for refinancing but still need to reduce your carrying charges, there are other alternatives, industry officials say. They recommend that you approach the lender that gave you your existing mortgage and ask if them if they can modify the terms. Today, most lenders would rather rework terms if you don't qualify for refinancing than get stuck with one more house that's in foreclosure.
- Despite some sites that are scams, legitimate and attractive mortgage refinancing offers can be found online. But you may be viewed as a one-time customer. Working with a local lender can let you to build a long-term financial relationship.
? Copley News Service
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