Dave Skaff: Time to refinance?
There's nothing like 30-year mortgage rates near 4 percent and 15-year even lower to make homeowners daydream about refinancing. But not everyone would come out ahead if they did. And borrowers with little (or negative) equity are in a tight spot -- though changes to the federal Home Affordable Refinance Program announced this week are aimed at increasing their chances of getting approved.
Today's guest poster, Dave Skaff, wants to shed some light on the subject. He's an M&T Bank regional mortgage manager responsible for loan officer staff in the mid-Atlantic.
Take it away, Dave:
Mortgage rates are at historic lows. For millions of Americans, now could be the right time to make a move to improve their monthly cash flow. But getting a home loan in today's mortgage world is not as easy as it once was. Declining values and stricter documentation guidelines make it challenging for many folks. For anyone who is interested in refinancing, there are several key points to consider:
1) A small drop of just 1 percent could make it worthwhile to refinance for someone with a large loan balance. A few hundred dollars per month could be saved on a $300,000 loan, for example. On a lower loan balance, the monthly savings could be outweighed by the costs involved. It is best to consult with a mortgage specialist to see if refinancing makes sense for you.
2) As a first step, it's a great idea to utilize an independent source, such as a local Realtor, to help you determine the value of your home. Once you do that, you'll be able to see what options are available by contacting a mortgage loan officer to analyze the data.
3) Generally speaking, someone could refinance their home with as little as 5 to 10 percent equity in their home. FHA mortgages allow for just 2.25 percent equity. Additionally, there are many loan programs available today to help people who are "underwater," such as the HARP program, which was introduced by the Obama administration last year and amended this week.
The changes to the HARP program could enable more borrowers whose mortgages are backed by Freddie and Fannie and owe more than their home is worth to take advantage of low interest rates and other refinancing benefits. There are a series of changes that could make the program more attractive to these borrowers, including the removal of the current 125 percent loan-to-value ceiling for fixed-rate mortgages backed by Freddie and Fannie.
4) Many people are even considering changing to a 15-year term from their current 30-year term. This may make sense for a lot of homeowners as rates have dropped so much that in some cases changing to a 15-year term does not increase their monthly payment by much, if at all. In doing so, a homeowner can save tens or sometimes hundreds of thousands of dollars over the life of their mortgage, depending on the size of the loan.
5) Another option that may be available to some homeowners is the ability to take cash out of their house for home improvements, to pay for college education, etc. To do so, one would need to have plenty of equity in their property. Typically, the maximum amount would be limited up to 75 to 85 percent of the value of the home, depending on the loan program.
The mortgage industry has become extremely complex in recent times. The requirements that go into determining what type of loan may be possible for someone have become very elaborate with many factors involved. All of the items mentioned above vary depending on things like credit scores, property type, equity that is available in a property, etc. So, anyone who is thinking about a refinance (or a home purchase, for that matter) will need to take the time and sit down with a mortgage loan officer to review all of the options, because it's not as easy as it once was.
Interest rates will likely remain at historical lows through the end of the year. It remains to be seen what might happen in 2012. But as an economic recovery gains momentum, interest rates will likely rise accordingly. Which means that if refinancing makes sense for you, do not wait so long that you miss the window of historically low interest rates.
Thoughts, questions, arguments? Comment away.
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