As 30-year mortgages continue to hover around the 5 percent mark, interest in refinancing has remained high.
But even as some homeowners seek to trade in their adjustable-rate mortgages (ARMs) for fixed-rate loans, or combine first and second mortgages into one loan with a lower overall interest rate, others who would like to get in on the action can’t make it work.
There are many reasons why refinancing doesn’t work for some homeowners. In an era of declining property values, job loss, income reduction, legislative and regulation change, more homeowners are finding themselves out of luck when they visit their local lender. According to Eileen Fitzpatrick, a spokesperson for Freddie Mac, the top reasons for not being able to refinance include (in no particular order): lack of equity due to falling house prices; low credit scores; tighter credit/lending standards; junior liens (where the total debt or loan balances leave insufficient equity); and lack of employment.
Let’s take a look at the top reasons why refinancing won’t work for many homeowners, even as interest rates fall to historic levels, and what you can do about it:
1. You don’t have enough (or any) equity in your house.
Feel like your house isn’t worth what it once was? You’re right on the money. According to the Case-Shiller House Price Index, property values dropped an average of 18 percent last year. With property values dropping like stones, many homeowners are finding their homes are either worth less than what they owe (called “negative equity”) or are worth exactly what they owe, meaning there is no equity in the property.
If you don’t have enough equity or if you have negative equity, you won’t be able to refinance your home — unless you have a lender that will refinance without doing an appraisal. Currently FHA is doing a “streamline refinance” for its loans that does not require an appraisal.
The federal government just announced it would help homeowners plagued by negative or inadequate equity by writing down the value of mortgages it owns. Watch for information on how to know if you have one of these loans and who you should call for help.
2. You don’t earn enough income.
At the height of the real estate market several years ago, you could tell the lender what you earned — and no one would have called your job to verify your salary.
Today, lending standards are a lot tighter and if you don’t earn enough income, you won’t qualify to buy a home or refinance your existing mortgage, which is a problem these days, given the rather grim economic environment.
If you’re out of work, you won’t be able to refinance unless you can show proof of other income, including renting out part of your primary residence, or having a family member (who has a job) co-sign the mortgage documents with you.
If the problem isn’t really your income (let’s say it hasn’t changed) but the debt you’re carrying, consider paying down (or paying off) credit-card debt, auto loans, school loans or any personal loans that you have. There’s no use keeping money in the bank if you are carrying high-interest debt. This can also help to get your debt-to-income (also known as “DTI”) ratios back in order.
3. Your credit history and credit score aren’t good enough.
As lenders are requiring more income, they’re also requiring a higher credit score in order to get the best interest rate. If you could have gotten the best mortgage interest rate with a score of 680 or 700 three years ago, you might need 720 or even 760 today. (This is also true for auto loans.)
What can you do? If your credit history and score aren’t quite where you’d like them to be, but you don’t want to pass up a chance to refinance and save some cash, consider refinancing with an FHA loan. FHA requires a lower credit score than conventional lenders to get the best interest rates. Find out more at www.hud.gov (where you can get linked to a HUD-approved housing counselor in your area).
You should also work on rebuilding your credit history by paying all of your bills on time and in full (if possible) each month.
4. You’re a successful real estate investor who owns too many properties.
If you’re investing in real estate, even if you’re doing it successfully, you’ll find that the game has changed with regard to financing those properties. While previously you could have refinanced if you had up to 10 properties that you owned, today you’ll have trouble if you own more than four properties at the same time.
Why? Lenders are being burned big-time by real estate investors who stretched way beyond what was reasonable to buy up more properties. Now those properties are worth less (sometimes a lot less) than what the investor paid and the low-interest-rate teaser loan has converted into a higher-cost loan.
I’m often asked what real estate investors can do in this market? My answer: Not much. There aren’t a lot of lenders out there willing to work with real estate investors to finance or refinance their property. And if you own too many properties, you may find it impossible to refinance your primary residence as well.
5. You can’t save enough with a refinance to make the effort worthwhile.
I get e-mails daily from readers who want to know if they should refinance. For some folks, the answer will be an easy “yes.” But for most homeowners, the answer is more complicated.
The big mistake homeowners are making is focusing too much on the interest rate and not enough on how much they’re actually saving by refinancing the loan.
Here’s one easy rule: If you can reduce your monthly payment enough to pay off the costs of the refinance within a year, and you’re going to stay in your house for at least four to six years, then it probably pays to refinance your mortgage.
But remember, reducing your payment while lengthening the term of the mortgage makes sense only if you’re having a cash-flow problem today. In other words, if you need a refinance to make your paycheck last through the end of the month, then do it, even if it means you’ll pay more interest over the life of the loan.
But if you’re already 15 years into your mortgage and it would reset to 30 years, that may not make sense. Try to get a 15-year mortgage at a lower interest rate so that you’re truly saving money.