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.
Not in the running
Seeing 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.
Qualifying at a cost
Other homeowners who have credit scores in the 600s and a modest amount of equity may be able to refinance, but at a higher cost.
For example, mortgage loan providers Fannie Mae and Freddie Mac recently announced that borrowers who have credit scores of 680 and below will have to pay a surcharge that could add thousands to the cost of the loan.
“In the past, lenders always considered anything above 620 good,” says Hanzimanolis. “People come in today with a 675 and the rates that the banks have to offer are so much higher that it doesn’t make sense for many customers,” he adds.
There are also fewer options for people who have unconventional financial situations such as self-employed individuals. “There are still programs out there, but they’re being offered by fewer lenders,” Hanzimanolis says. Such programs typically require higher credit scores and a larger down payment, meaning there is less money available to borrow if a homeowner is refinancing.
Finally, consumers who have second mortgages on their homes may run into a snag. In order for a consumer to refinance a first mortgage, the holder of the second mortgage must agree to ” subordinate” the second mortgage to the new first mortgage. That decision is entirely up to the second mortgage holder. If that lender refuses to subordinate the second mortgage, the only option the consumer has is to qualify for a new first mortgage that will pay off the second.
For people who have limited options, it might make more sense to use a mortgage broker rather than a bank, says Hanzimanolis, since brokers work with a variety of lenders and typically offer more loan products.
Pick of the litter
For those consumers with more than 20 percent equity in their homes and credit scores in the 700s or higher, the world of refinancing is their oyster.
“There are folks that have purchased their property 10 years ago and housing prices have escalated astronomically. Those people who brought those properties — even with property declines — still have that level of equity that if they choose to refinance, it’s still something they can probably do,” says Vasquez.
Consumers with equity and excellent credit will also get the lowest interest rates, whether they use a bank, credit union or a broker, so it typically does not matter as much where they apply for their loan.
A good place to start your refinancing journey is with your current lender. But it never hurts to “shop around and compare,” says Hanzimanolis.
“Any good mortgage originator whether it be a bank, a credit union or a broker, should have no problem offering you a complete good faith estimate at your initial sit-down with them, whether you’ve officially applied or not,” he says.
Tamara Holmes is a freelance writer based in Maryland.