New Realities of Mortgage Refinancing (Part 1)
By: Benjamin Gram
With mortgage rates at record lows, many homeowners are looking to refinance their mortgages to save money on their monthly payments and/or pay off their mortgages faster. But what do people need to expect if they want to refinance? Is it still possible to get a home loan? Do you need a perfect credit score? What does it take to qualify, and what options do borrowers have for structuring their new loans?
Stephen Luigi Piazza, Vice President at Quicken Loans, says that the current climate for refinancing is offering some big opportunities to families who have the right combination of good credit, home equity and steady income - but the realities of refinancing are different in 2011 than they were five years ago at the peak of the housing boom.
"There is an extraordinary opportunity right now for qualifying homeowners to refinance their mortgages at a significant savings over their previous interest rate," said Piazza. "Pretty much every homeowner in the country, assuming they meet the guidelines, can improve their interest rate compared to what they currently have."
But just because interest rates are low doesn't mean every homeowner will qualify to refinance. Banks and mortgage lenders are maintaining higher standards and stronger restrictions on which borrowers get approved to refinance, based on such factors as credit scores, income documentation, debt-to-income and loan-to-value ratios.
"It's a bit more difficult now to get approved for a refinance, as far as qualifying purposes, than in previous years," said Piazza. "Fannie Mae and Freddie Mac, the government-sponsored enterprises that provide much of the financial backing for the U.S. mortgage market, have increased their guidelines and restrictions. This is just the reality that you need to start with if you want to refinance. However, if you meet the guidelines, the rewards of refinancing can be significant."
Piazza also said that one of the biggest myths of today's mortgage market is that "there's no money" and banks aren't lending. "There's still plenty of money out there," he said. "The guidelines are tighter, but we're still lending to people who qualify, and plenty of people do qualify to refinance, even under the tighter guidelines of today."
What should you know if you want to refinance?
And what are some of the latest trends in refinancing?
Lock in a rate for 45 days. When you start the process of refinancing, the mortgage lender will give you a "locked in" interest rate that they guarantee to give you if you close on your loan within a specified timeframe.
Piazza recommends that anyone who wants to refinance should make sure to lock in an interest rate for at least 45 days. The reason? Mortgage lenders are incredibly busy right now with all the demand for refinances, and they need to allow sufficient time for all the work to be done in closing each new refinance.
"The mortgage industry's going to be challenged if everyone comes in at once," he said. "You're better off allowing plenty of time for the dotting of the i's and crossing of the t's - every refinance is a complex transaction with lots of steps in the process."
Recoup your costs within 2 years. The general rule of thumb for refinancing is that it's a good deal if you can recoup the closing costs (appraisal fees, attorney fees, etc.) within 24 months of refinancing the loan. So if your closing costs amount to $3,000, you would want to be saving at least $125 per month on your new monthly payment to be able to quickly recoup those costs within the 24 month timeframe.
Consider a term of less than 30 years. Instead of starting over with a new 30-year mortgage (albeit at a lower interest rate and lower monthly payment), many borrowers are asking for refinanced mortgages at terms shorter than 30 years.
"A significant percentage of our clients are going for terms shorter than 30 years," said Piazza. "We have this whole element of society now that really wants to get out of debt faster, and go back to the old days of 'burning the mortgage' once it's paid off."
COMING SOON: In Part 2 of this series, we'll explore some of the other tips and trends that borrowers need to know about the new reality of refinancing.
Whether you want to get ready to refinance, save for a down payment or just improve your overall financial standing, check out Quizzle.com for great personal finance tools and resources. With Quizzle, you can improve your credit, find out what home loan programs you qualify for and make better financial decisions.
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