With mortgage rates still at record-lows, refinancing continues to be a powerful tool to lighten the debt burden of homeowners. Unfortunately, lower-income borrowers often refrain from striking a better deal and housing professionals may not recognize the extent to which refinancing improves the odds of sustainable homeownership for this group.
By working with consumers to address their misconceptions regarding refinancing, housing professionals can help eligible low-income borrowers take full advantage of this opportunity to lower their monthly mortgage payments and better position themselves financially during the current recession.
- A 1% reduction in interest rate for a $125,000, 30-year mortgage can generate $70 in monthly savings or $840 annually—a meaningful difference for low-income households.
Uncertainty and financial anxiety abound
Low-income homeowners may be unsure of the ability to refinance or they may believe that rules preclude them from switching out a higher rate with a less-costly one.
The amount of the loan transaction can stand to discourage some borrowers from going through the loan process again, even if it puts them ahead in the long run. Aggregating documentation for a new mortgage can feel overwhelming, especially if an applicant thinks they have low odds of getting an offer that makes refinancing worthwhile.
There may be a gap in understanding the break-even point on a refinance considering closing costs; a $250 decrease in monthly payments recoups $3,000 in addition to the loan balance in a 12-month period.
These topics are opportunities for real estate professionals to assist past and future clients to navigate these waters and serve individual homeowners, build sustainable communities and grow their personal brand and pipeline for future home purchases.
How refinancing can help low-income homeowners
Refinancing with a new loan can improve a low-income borrower’s situation by:
- Freeing up money each month to offset other living expenses or to build savings.
- Increasing equity faster by switching to a shorter-term loan that’s affordable at a lower rate.
- Switching to a fixed-rate mortgage from an adjustable rate mortgage to limit the risk of future, higher interest.
- Lowering private mortgage insurance (PMI) by switching from a Federal Housing Administration (FHA) mortgage to a conventional loan with cancellable, lower-cost mortgage insurance (MI).
- Eliminating mortgage insurance outright if the loan-to-value ratio on the home is greater than 80% at refinancing.
Financial realities and misconceptions about refinancing
Closing costs for a new mortgage average about $5,000, but this shouldn’t be a deal-breaker for borrowers with less cash to pay them. What matters is their situation and the degree to savings outweighing expenses. It may make sense to finance closing costs in the loan amount or through a slightly higher interest rate. Low-income borrowers may also be eligible for grants to cover closing costs.
Another important advantage is that, for many low-income borrowers, lenders will still be able to refinance mortgages without having to pay a fee of 50 basis points on the amount of the new loan. The rule, which takes effect for lenders on December 1st, exempts borrowers with:
- Loan balances of less than $125,000, nearly half of which are held by low-income borrowers whose annual income is under 80% of the area median income.
- A Freddie Mac Home Possible® refinance mortgage, regardless if it is greater than $125,000.
What’s next? Learn more about how to promote low-income refinancing and ways to build community networks and future clients.