Refinance applications jumped during the first week of 2008, according to a recent weekly survey from the Mortgage Bankers Association. The catalyst was lower interest rates on 30-year fixed-rate mortgages that hovered below 6 percent on average at the end of the first week in January, and rates have fallen further since then.
During the recent years of record home buying, most buyers opted for adjustable-rate mortgages (ARMs) rather than fixed-rate financing. The most popular mortgage vehicle was the fixed ARM with an interest rate that was initially fixed at a below-market interest rate for three or five years. At the end of this time, the interest rate resets to a new rate, and the loan converts to an ARM with an interest rate and monthly payment that fluctuate over time.
A record number of these fixed-ARM mortgages are due for resets this year. It’s anticipated that 2008 will be a big year for refinancing.
HOUSE HUNTING TIP: Even though you may be counting on interest rates dropping further, don’t wait until the last minute to start the refinancing process. The credit crisis that began in August 2007 has impacted the entire mortgage industry, not just the purchase mortgage part of the business. This means that it may be more difficult for you to refinance now than it was the last time.
Many home buyers who bought during the hot markets of recent years qualified for financing by using a stated-income mortgage. Lenders didn’t require borrowers to verify their income by providing tax returns or employment verification in order to qualify for a loan. Some buyers, or their mortgage brokers, overstated income so the loan would be approved.
Those days are over. Stated-income mortgages are a dying breed and those that are available won’t work for most refinancers. For example, Washington Mutual offers a stated-income mortgage, but only in amounts up to 50 percent of the value of the property.
Lenders are also more cautious about lending in areas that they perceive are losing value. Both Alameda and Contra Costa counties in the San Francisco Bay Area are considered deflating markets by some lenders. In these areas, borrowers may be required to pay more upfront fees. Some lenders reduce the size loan they’ll grant by 5 percent in areas they designate as deflating markets.
Refinancers who need a conforming loan of $417,000 or less, and who have good credit will find that refinancing is easier than it would be if they needed a jumbo mortgage in an amount over $417,000. But homeowners who need a jumbo mortgage and who have at least 20 percent equity in their home, good credit and enough verifiable income to justify mortgage qualification shouldn’t have difficulty refinancing.
Still those who have credit and income issues will have difficulty refinancing in today’s market. The easy-qualifier options that enabled so many to buy a home in recent years have dried up. Homeowners who did cash-out refinances when prices were escalating may find that their home won’t appraise high enough to enable them to pay off their current mortgage through a refinance.
There are several options for homeowners in this situation. One would be to pay down the current loan to a level that could then be refinanced. If there’s no cash available to pay toward reducing the size of the mortgage, talk to your lender to find out if you can negotiate an interest-rate modification so that your payments don’t jump drastically when your mortgage resets. Another option is to forgo refinancing.
THE CLOSING: Before opting for foreclosure, explore every option with your lender to see if there is a way for you to keep your home.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
