During the height of the real estate boom, it was not only possible to buy a home with little cash and less-than-ideal credit, but with soaring real estate prices, it was easy to refinance as well.
As a result, many homeowners cashed in on lower interest rates and pulled equity out of their homes to pay off other debts. But that was then and this is now. As home prices fell and lenders started tightening their underwriting rules, the equity many thought they had vanished. While refinancing still provides the same great advantages to homeowners, fewer consumers will be able to benefit from it.
"Refinancing is still being done," says Jason Vasquez, a spokesman for the Mortgage Bankers Association. However, people will likely need good or great credit scores, income documentation and equity in their homes to qualify.Homeowners have several good reasons to consider refinancing, says George Hanzimanolis, immediate past president of the National Association of Mortgage Brokers and current president of Bankers First Mortgage in Tannersville, Pa.:
1. Rates are low. "We're seeing rates now back down under 6 percent," says Hanzimanolis. "Anytime you see the market hit that 6 percent or below it seems like there's a surge of people coming out to refinance again."
2. Increased savings can be realized. By refinancing to a lower interest rate, consumers can often save a couple hundred dollars a month. "Start recognizing that $200 to $300 monthly savings now rather than wait several months to see if the interest rates are going to drop another quarter," Hanzimanolis says.
3. Homeowners can switch to a fixed rate. Homeowners who currently have an adjustable mortgage can refinance into a fixed-rate mortgage so they don't have to worry about rising mortgage costs after a loan resets.
4. Debt can be consolidated. Consumers with other debts may be able to refinance and use some of the equity in their homes to pay those debts off, improving cash flow.
Not in the runningSeeing the benefits of refinancing is easy, but for some, realizing those benefits is another story altogether.
Those consumers who won't be able to refinance typically fall into two camps.
1. Low credit scores: "There were people who had credit scores in the mid-500s who were able to get subprime loans," says Hanzimanolis. "Their feeling was, 'I'll take this, keep it for a year or two, work on my credit and when my credit score gets better, I'll be able to refinance. Well, if they're still in that mid-500 range, they're having a very difficult time refinancing."
2. Low equity: The second group is made up of those who have little or no equity in their homes. Many people who bought at the top of the market have seen the equity in their homes decrease during the recent real estate correction. As a result, "those people may not be able to refinance today," Hanzimanolis says. Worse yet, some homeowners are "upside down" (owe more than their home is worth) on their mortgages. In most cases, the less equity you have, the less likely it is that you'll be able to refinance.