By John Wasik
CHICAGO, June 15 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
Yet it's not always a good time to refinance. Here are some
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
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
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
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.