Mortgage Refinance Boom Fueled by Low Rates

Homeowners raced to the mortgage companies last week in an effort to refinance their mortgages after home refinancing rates dropped below 5% for the first time since May.  Refinance applications climbed 18% from the previous week, the Mortgage Bankers Association reported Wednesday, as rates on 30-year home loans dropped to their lowest level in four months to 4.89%.  With extra cash lining their pockets each month, homeowners could help the economy recover. Since the recession began, American consumers have reined in spending, which accounts for up to 70% of the economy.  Mortgage refinancing can save a few hundred dollars and that could go a long way in freeing up cash flow for family finances.   But more than 16 million homeowners owe more on their home loans than their homes are worth. Savings from mortgage refinancing would have to cover the difference. Other borrowers simply do not qualify with stricter guidelines that require higher credit score and income standards to be documented. And requirements for refinancing certain government loans will get tougher in November.

The Federal Reserve started buying mortgage loan securities in January to drive down mortgage rates. But it plans to slow its purchases of mortgage-related debt and extend the program through the first three months of 2010, which will likely push rates higher.  Still, current low rates helped borrowers like Kimberly Austin in Kalamazoo, Mich., cut her monthly payment by more than $300 to $934. Austin, a 40-year-old accounts receivable clerk, ticked off a list of where that extra cash will go. A new roof, updating the electrical system and other improvements on the older house she bought in June of last year.  “That money would be a huge help,” said Austin, who is set to complete the refinance on Thursday.  For Tanya Schlicht in Greenfield, Wisconsin, home refinancing will help cushion the loss of income from her husband’s job loss earlier this year. Schlicht, who works in a nursing home, is in the process of qualifying with just her income and wants to roll a costly second mortgage into one home loan that would save them money. The refinance loan will save them a much-needed $200 a month. 

Many calls mortgage brokers received last week came from borrowers who couldn’t qualify for a new loan because of lower incomes, stricter credit standards or declining home values.  According to Les Berman of EB Financial, the new rules designed to limit conflicts of interest in the appraisal industry also are hindering mortgage refinance applications because appraisals are coming in low.  Berman believes the mortgage lenders are stricter too. Before, Berman said they would accept a refinance application if the mortgage payment, taxes, insurance and all other debt added up to half a borrower’s income. Now, the magic number is 41%.

The Obama Administration launched a mortgage relief plan in April to help borrowers with home refinancing, even if their home has lost value. Fannie Mae and Freddie Mac are accepting borrowers who owe up to 25% more than their home are worth. But so far, only about 85,000 homeowners have had their loans refinanced under the plan, well below original expectations of 5 million.  “I personally haven’t seen one yet,” Berman said.  And on Nov. 18th, new requirements go into effect for borrowers who want to refinance a loan insured by the Federal Housing Administration. The FHA streamline refinance requires at least six months of payments before a borrower can take advantage of the program, and verification of assets, job and income. Also, more borrowers will need to come up with cash out of pocket to refinance because of revised rules to calculate the maximum loan amount relative to the home’s value.  Pava Leyrer of Heritage National Mortgage, said, “Unfortunately, that will stop up to 85% of my FHA streamline loans.”

Mortgage brokers say a refinancing is worthwhile if you can shave off at least $100 from your monthly payment or get a full percentage point rate reduction.  That’s why mortgage rates below 5% are so appealing.. Refinance rates hit a record low of 4.75% in the spring.  “The experts say rates are going back up,” said John Stearns, vice president at Robbins and Lloyd Mortgage in Mequon, Wis. “We’re making hay while we can now.  Article was written by J.W. ELPHINSTONE.