Can I Refinance and Should I? Part 2

Matthew Sweetanos, Branch Manager

Supreme Lending

matt@cvilleloans.com and matt@fredloans.com

Office: 434-882-3472

 

Last post, does it make financial sense to refinance.  In this post, what will it take in credit worthiness and loan value to property value to meet the lender requirements for a refinance.  If your credit has suffered with mortgage late payments, recent foreclosure or bankruptcy it is going to be next to impossible to qualify for any of the great rates you see advertised.  In fact, one of the little secrets is that the advertised rates are often for conforming loans, which currently means loans less than $417,000.  Loans over $417,000 are called Jumbo, and fall into a different category of pricing.  Many banks just don’t want to take the risk associated with larger loans that may not be able to be sold on the secondary market.  If the lender must hold the loan themselves instead of being able to sell it, it means they have less money to lend.  Since most lenders are not in the business of holding and servicing loans, they just avoid the jumbo market altogether, or charge a rate premium to lend to those clients.  When shopping for rates, be sure to verify that the rate applies to your loan amount. 

 

Credit challenges other than mortgage lates, foreclosure and bankruptcy can often be ameliorated, but as a rule of thumb, whatever your credit problems, you will need a credit score of at least 620.  Don’t use free credit reports to ascertain your credit score, as the scoring model they use will probably be different than that of the credit reporting company a mortgage professional will use.  Have a loan officer pull you credit and give a copy to you.  Of the three scores you will see, the lender will use the middle one as your qualifying score.  If a couple, they will use the lower of the middle scores for the couple.  If you are above 620, you have crossed the first hurdle; the minimum credit score of many lenders today.  If you are in the mid-700s or higher, you may qualify for slightly better rates.  This is the time to protect your credit score as much as you are able and make sure you are making timely payments.  There are a number of strategies for enhancing your credit score, but we will have to cover that in a separate post.

 

That leaves value.  First, don’t depend on the assessed value or on Zillow to get an accurate determination of value.  Assessed values include a metric for county budget needs.  This means the amount they assign may differ dramatically with an actual appraised value.  If you are considering a refinance, don’t order the appraisal yourself; have it ordered through your mortgage professional.  Appraisals ordered by the homeowner are usually not acceptable to a lender.

 

Depending on where you live in Virginia and what type of house you own, you may have seen a moderate to a dramatic loss of value.  New houses tend to be worth more than older houses of the same square footage and features, so if your neighborhood has predominately newer homes in it you may be more likely to get a better value from an appraiser.  How much equity you have in your home will be a big factor for your refinance options.   If you have over 20% equity, you have the most options, but even if you don’t have a lot of equity, there may still be options for you with FHA or VA (if you are a veteran).  Check with your mortgage professional to help you work through the maze and determine if this is a good time for you to refinance.

Can I Refinance and Should I? Part 1

Matthew Sweetanos, Branch Manager

Supreme Lending

matt@cvilleloans.com and matt@fredloans.com

Office: 434-882-3472

 

With the great rates we have seen in the last few months, people who have held back from the last refinance boom are asking if they should refinance now.  It’s a great question fraught with pros and cons that make the decision difficult to generalize, but here are a few basics to help you determine if this is the right time for you.

 

Can you recoup the cost of refinancing within a reasonable timeframe?  Let’s start with what the cost of refinancing is.  If it costs you $9,000 to refinance your house, and you’ll save only $50 per month, then it will take 180 months, or 15 years just to break even on the refinance.  It makes no difference what rate you get, whether it’s a full percentage point less than your current rate or two or three points less; it doesn’t matter if you won’t recoup the cost for several years.  Who doesn’t want a 4% rate?  It sounds great if you currently have a 6% rate since you would cut your rate by 2% points, but let’s look at an example.

 

You have a $200,000 loan with a 6% mortgage and a principle and interest payment of $1,199.11.  By refinancing with a 4% mortgage, your payment will decrease to $954.84, or a savings of $244.27 per month.  Still sounds good.  Now let’s ballpark the closing costs.  Don’t be taken in by brokers or lenders who say they are going to pay all your closing costs.  You are paying them somewhere, either through fees or a higher interest rate, but make no mistake, you will be paying them.  I am estimating $7,700 to refinance this mortgage, which includes tax stamps which must be paid to the state, recording and title fees, lender’s title insurance, escrows for the new lender to pay your hazard insurance and property taxes, appraisal , origination and lender fees.  Even with the $244.27 savings from the new payment, it still takes over 31 months, or a little under 3 years, to pay for the refinance before you start seeing the actual savings.

 

The unfortunate reality is that 4% rates are still elusive without paying extra in closing costs to buy the rate down.  Most people will be looking at more like a 1% reduction in rate, which would translate into a monthly savings in the above example of only $125.46.  That amount of savings would require over 5 years to pay for the cost of closing before you would start to see an actual net monthly savings.

 

Since the closing costs in the above example can be financed into the loan amount, you would not be out of pocket for the closing expense, in which case you have to determine if the increase in monthly cash flow is enough of an inducement to justify the refinance.

 

Next post, the biggest pitfalls to refinacing in our current environment–credit worthiness and loan to value.

What’s in the Stimulus Bill to help you with your mortgage?

Matthew Sweetanos, Branch Manager

Supreme Lending

Phone: (434) 882-3472

matt@cvilleloans.com or matt@fredloans.com

A special thanks to Coy Barefoot, host of Charlottesville Right Now! on 1070AM WINA, for the opportunity to be on his show yesterday.  It was a blast and it looks like we’ll be getting together regularly to discuss what’s happening in the mortgage industry that affects us in Charlottesville and Fredericksburg.  If you missed the show, you can download the podcast at the show’s webpage, http://www.wina.com/Charlottesville-Right-Now/3056918.

We discussed the new stimulus plan and what is in bill that might be of benefit to homeowners or those looking to purchase.  A special thanks to Dave Phillips with CAAR (Charlottesville Area Association of Realtors) with his clarification of the first time home buyers tax credit.  The following is from his very well done CAAR Blog.

H.R. 1, the “American Recovery and Reinvestment Act of 2009″ (AARA), passed the House on February 13, 2009, by a vote of 246 – 184. On the same day, the Senate passed the bill by a vote of 60 – 39. The President signed the bill on Tuesday, February 17, 2009. The bill is a $780 billion package, with roughly 35% of the package devoted to tax cuts (mostly for 2009) and the rest to spending intended to occur in 2009 and 2010.

The bill includes the following provisions:

• Homebuyer Tax Credit — The bill provides for a $8,000 tax credit that would be available to first-time home buyers for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009. The credit does not require repayment. Most of the mechanics of the credit will be the same as under the 2008 rules: the credit will be claimed on a tax return to reduce the purchaser’s income tax liability. If any credit amount remains unused, then the unused amount will be refunded as a check to the purchaser.
• FHA, Fannie Mae and Freddie Mac Loan Limits — The bill reinstates last year’s 2008 loan limits for FHA, Freddie Mac, and Fannie Mae loans. These limits were equal to the greater of 125% of the 2008 local area median home price or $271,050 for FHA and $417,000 for Fannie and Freddie, with an overall maximum cap of $729,750. For the few areas where the 2009 limits were higher, the higher limits will apply. In addition, the bill includes language providing the HUD Secretary with the discretion, if warranted, to increase the loan limit for any “sub-area”, i.e.an area smaller than a county. The Secretary’s discretion is again limited by the $729,750 cap. These 2009 limits will expire December 31, 2009.
• Rural Housing Service — The bill provides an additional $500 million to existing USDA Rural Housing programs. The RHS provides both a guaranteed loan program and a direct housing loan program for those meeting the program’s eligibility criteria. The direct loan program will receive $270 million while $230 million will be allocated for unsubsidized guaranteed loans. It has been reported that this level of funding would provide for an additional 192,000 homeowners.

Additionally, the President has announced plans to help homeowners fend off foreclosure.  Here are the basics and hopefully we will be getting the details soon.

1. Make it possible for 4-5M Freddie Mac & Fannie Mae loan holders to:

refinance at lower rates changes the policy that Fannie and Freddie  are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth enable families with higher loan rates who may be underwater to refinance.  Although Fannie & Freddie would take in less money from loans, they would lose less due to foreclosures

2. Create new incentives so that lenders can work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure:

Sub-prime loans are only 12% of all mortgages, but about 50% of all foreclosures.  Clear guidelines for mortgage industry will be established that will encourage lenders to modify mortgages on primary residences.  Lenders wanting to receive financial assistance from the government and modify home mortgages must meet these guidelines, which will be in place by March 4.  Reduced payments must be no more than 31% of homeowner’s income
3.  Take major steps to keep mortgage rates low for millions of middle-class families looking to secure new mortgages:
Treasury and Federal Reserve will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to ensure stability and liquidity.  Treasury will provide up to $200 billion in capital to ensure that Fannie Mae and Freddie Mac can continue to stabilize markets and hold mortgage rates down
will also work with state housing finance authorities.
4. Pursue wide range of reforms to help families stay in home:

Continue support reforming our bankruptcy rules to allow judges to reduce home mortgages on primary residences to their fair market value, as long as borrowers pay their debts accordingly
As part of the stimulus plan, award $2 billion in competitive grants to communities bringing people together and testing new and innovative ways to prevent foreclosures.