COLUMN-Five contrarian reasons not to refinance

Fri Jun 15, 2012 12:07pm EDT

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By John Wasik

CHICAGO, June 15 (Reuters) - These days, lenders are incredibly picky when it comes to customers. When I looked into refinancing a few months ago, a mortgage broker asked for two years of tax filings, and wanted my accountant to certify them. Since the savings on a new loan would've been minor, I passed.

That's not the advice you hear most, though, when it comes to refinancing in today's rate market. With 30-year loan rates still under 4 percent, if you know you're going to stay in your home for a while - or need to cut payments on other properties you own - don't wait.

Unless the U.S. economy goes on life support again, it's hard to believe that rates will go any lower - in the June 14 Freddie Mac mortgage survey rates were 3.71 percent for 30-year loans and 2.98 percent for 15-year notes. Until this week, those averages showed a quiet six-week streak of record-low rates.

To put those rock-bottom rates in perspective, last year at this time, 30-year loans averaged 4.5 percent. During the meltdown year of 2008, they were 6.3 percent. In June of 2002, they were 6.6 percent; 8.5 percent in 1992; 16.7 percent in 1982; and 7.4 percent in 1972. So there's little argument that we're still experiencing the lowest mortgage rates in two generations.

Yet it's not always a good time to refinance. Here are some key considerations:

1. What if your decision to refinance extends beyond lowering the annual percentage rate and monthly payments?

Maybe your focus is still on equity appreciation down the road. In one sense, refinancing affirms that you believe that your home is still a worthy investment. That may not be the case if the housing market takes a decade or more to heal or the U.S. economy and job market in general are headed for meager growth in the years ahead.

Recent history is not encouraging. When it comes to the investment of homeownership, Americans got walloped between 2007 to 2010 as the housing market melted down. According to the Federal Reserve, the median family's net worth declined about 40 percent during that period, mostly due to home-equity depreciation. That was the biggest free fall in net worth since 1989. How is your local market doing? Bouncing back or still being hit by foreclosures, which depress prices?

2. Do you want to get into more debt?

By itself, refinancing typically involves closing costs that are from 2 percent to 4 percent of the loan value. Many homeowners don't pay those costs upfront and add them to the loan balance. Lower monthly payments aside, why add to your mortgage debt if you've lost equity? Keep in mind that as you're refinancing, you won't be able to write down the lost principal - unless you're on the brink of foreclosure and qualify for a special government program such as HAMP or your bank approves it.

3. Do you need to cut your losses?

Nearly every market poses a different argument for refinancing. Again, if you think of your home as an investment, you may not see any equity appreciation for years, although prices may be on the rebound in the markets worst hit when the bubble popped. According to a Realtor.com May survey, median list prices have recovered 14 percent year-over-year in places like West Palm Beach and up to 33 percent in Phoenix. Even Miami is up 15 percent.

Other places are not so fortunate. Areas in Eastern Pennsylvania such as Reading and Allentown are down 5 percent during the same period. Chicago's prices dropped nearly 2.5 percent. And Stockton, California, after suffering dramatic price declines after the bubble burst, is still down more than 5 percent. Is the money you spend on refinancing costs sending good money after bad?

4. Are you realistic about your ability to qualify for a refi?

In the worst markets, refinancing may not even be possible if your equity loss is too great or you're underwater, that is, your mortgage balance exceeds the market value of your home. Most lenders won't even take your application if this is the case.

Those with less-than-stellar FICO credit scores or spotty income won't be offered the lowest rates. And you may even have to pay points - a percentage of the loan value - to "buy down" the rate even more. The low Freddie Mac rates quoted above, for example, assume payment of 0.7 of a point. Clean up your credit record if you can before you apply to boost your FICO score.

5. Will you even get a rate that's worthwhile?

You won't get the best rate if you fall into a number of borrower categories. You have to watch out for surcharges in loan rates called "loan level price adjustments." For example, say your FICO score is under 620 and you only have a five to 10-percent equity stake.

Loans underwritten by Fannie Mae, for example, will impose an "adverse delivery charge" of 3.25 percentage points. You also may be penalized for cash-outs, adjustable-rate loans, manufactured homes, condos and investment or multi-unit properties. So unless your credit score is above 700, your income steady and you're not buying properties subject to surcharges, those bargain rates may be an illusion.

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