How to refinance your home with low interest rates
Like some low-flying aircraft doing daredevil stunts, the mortgage rate has been buzzing so close to the ground you might have the impulse to duck for cover. Or, if you're savvy, you might try to grab it before it takes flight again.
"We've seen a tremendous increase in inquiries," says Bryan Smith, a mortgage broker with Quality Financial Solutions in Commack. And for the financially fit, those inquiries can result in a closed deal with a great interest rate in as little as four weeks, he says. "Let's say you're a great candidate - nice equity, good income - the rates are phenomenal." Qualified borrowers - those with plenty of equity - could even refinance their second mortgage, he says.
But some inquiries never make it past the initial phone call. Getting that implausibly low rate - the average 30-year fixed rate as of Aug. 12 is 4.44 percent, according to Freddie Mac - has proved to be a tricky for those who need it most. Here's what's standing in their way - and what experts say might help.
PROBLEM: Inflated expectations
The latest rate you see in advertisements and the media is not necessarily the rate you'll be offered. "That is a conventional rate, but you need to have pristine credit to get that," says Joan LaFemina, manager of homeowner services for the Community Development Corporation of Long Island in Centereach, a HUD-certified housing agency. In fact, the reasons you're trying to refinance might be the very things that will keep you from getting the best rate, she says. "It's never just one thing. It's a combination of factors" - namely credit, debt, income and home value.
What might help: Better financial literacy
Do your homework: Shop around, get at least three quotes and insist on seeing a good-faith estimate - an itemized list brokers and lenders are required to provide, disclosing all the estimated costs associated with the loan, says LaFemina.
Even if you don't qualify for that Cadillac rate, do the math to see if a refinance still might work for you. "There's one starting rule of thumb," says LaFemina. "If you can save even two percentage points on your mortgage - if someone is at eight and they can get six - it might make sense." Be sure to factor in things like how long it will take to recoup your closing costs, she advises. "People look at the immediate savings, but you have to look at the long-term."
PROBLEM: Depressed home values
"Home prices on Long Island had become so out of line with the ability to pay, as measured by income," says Pearl Kamer, chief economist of the Long Island Association. "We'd had such an escalation of prices during the boom, more than many other areas." Today, she adds, "Many are now underwater," meaning that homeowners owe more than the home is worth. Without equity, lenders are wary. "I don't have investors that will do a 95 percent refinance, except through an FHA lender. Eighty percent would be the maximum," says Smith.
What might help: Time, or the government
"It will be a couple of years before prices start to rise, and when they do it will happen at historical levels, such as 2 percent or 3 percent annually," Kamer says. "It may be another year or two years before we begin to see a sustained increase, and it will be in fairly small increments." That may sound like a long wait, but for a long-term investment such as a 30-year home loan, it's not a disaster. And you might still get low interest rates later, says Kamer. "The Federal Reserve would like to keep short-term rates low into 2011 and even 2012 . . . to give support to a very anemic economic recovery," she says.
If your mortgage is owned by Fannie Mae or Freddie Mac, you may be eligible for a refinance under the Home Affordable Refinance Program, even if you're underwater - to a point: If your first lien mortgage does not exceed 125 percent of the current market value (for instance, if your property is worth $200,000 and you owe $250,000 or less) you may qualify.
PROBLEM: Debt gone wild
"For a while there, the trend was to refinance so you could pay off your debt," says LaFemina. "To roll $10,000 into a house payment for credit card debt and pay $8,000 in closing costs doesn't seem cost-effective. That was a habit people got into, refinance to pay off debt - but that has a 75 percent failure rate. And now what's happened is a lot of people who did that during the boom, they have that debt again and they can't roll it in and refinance again." In a lender's eyes, a deeply indebted borrower is a risky borrower.
What might help: Sensible debt reduction
When you find yourself in a hole, stop digging. "Don't obtain any new debts," LaFemina says. If you know refinancing isn't an option, look for alternative ways to improve your debt-to-income ratio, such as negotiating with your credit card company for a lower interest rate. The adjustment could ding your credit initially, but can help your financial health in the long run. For help with debt management, consult a nonprofit credit counseling agency such as the National Foundation for Credit Counseling.
Beware of debt-consolidation scams, which can wind up doing more damage, cautions LaFemina. "True consolidation doesn't really exist, unless they take out a personal loan," she says. "If they can get a personal loan at a reduced rate, it might be less than the interest on the credit card and a light at the end of the tunnel."
PROBLEM: The credit conundrum
In theory, refinancing would be a great way to free up some cash to pay down other bills. It might be possible - if you've managed to keep up with all your payments so far. But every late or missed payment that shows up on your credit report is another nail in the coffin of your FICO score - a number lenders use to assess how risky it would be to give you a loan. So if you've fallen behind, the odds of getting approved for a refinance are slim to none.
What might help: Prudence, precision and patience
A poor score will hurt your chances with the lender, but there may be cases where you'd still have a shot. "If it's continual late payments on your mortgage history, or recent bankruptcy or foreclosure, nobody's even going to look at it" your application, says Smith. "But if it's history and your mortgage history is good, FHA will do diminished FICO scores."
Request your credit report from annualcredit
report.com - the only authorized source for the free credit report the law entitles you to see once a year. For a small fee (about $8, according to the FTC), you can see your score as well.
"There are often things that stay on the report that don't need to be there," says LaFemina. Make sure to have old items removed if they no longer belong there, and correct any inaccuracies that could be needlessly dragging down your score. "They don't have to pay somebody to repair their credit. They can go to the FTC. The website, ftc.gov, has guidance on how to repair credit, and sample letters," for making disputes in writing, LaFemina says.
PROBLEM: Job-market jitters
Certain loans are a thing of the past. "The ability for us to get loans with no income verification has basically dried up," says Smith. Unfortunately, so has much of the local job market - and its recovery is slow, says Kamer. "It's a chicken and egg situation," says Kamer. "Businesses won't hire until they're sure the recovery is for real, and consumers won't spend until the job market improves."
What might help: A loan modification or forbearance plan
If loss of income has disqualified you from refinancing, there are two plans under the federal Making Home Affordable program that could help.
If you still have some income, you may qualify for a modification under the Home Affordable Modification Program, which permanently adjusts a home loan's duration, interest rate or other terms to reduce the monthly payments for homeowners who are at risk for default due to financial hardship.
If you've lost your job, the Home Affordable Unemployment Program ostensibly provides homeowners a forbearance period, which is a temporary period of time during which your regular monthly mortgage payment is reduced or suspended. But loan servicer participation is voluntary, so in essence the program has been a nonstarter. "We haven't seen it work yet," says Susan Lagville, executive director of Housing Help, Inc. in Greenlawn.
If you still have some income, you may qualify for a modification under the Home Affordable Modification Program, which provides government incentives to lenders to permanently adjust a home loan's duration, interest rate or other terms to reduce the monthly payments for homeowners who are at risk for default due to financial hardship. This one's voluntary, too, and it's a lengthy, frustrating process, sometimes taking 12 months to get an answer.
But since your qualifications could improve during that time - you may find a tenant, or a higher-paying job, for instance - it's worth it to enlist the help of a nonprofit housing counselor and just keep trying, advises Lagville.
WHAT TO DO, FROM SEARCHING: At the start of the process
Get several quotes and review the Good Faith Estimates to make sure you're getting the best deal. An attorney is not required - borrowers sometimes choose to avoid the expense and trust in their loan officer's expertise - but it's not a bad idea to have one review all the documents.
A week before the closing
Call the lender in advance for a complete list of the documents you'll need, such as two forms of identification, an updated homeowner's insurance policy and a certified or cashier's check - not a personal check - to cover any closing costs you plan to pay upfront. You may have the option of financing those costs into your loan amount instead, but in that case you'll be paying interest on them. If the loan terms require it, you may have to set up a new escrow account to pay your property taxes and homeowner's insurance along with your monthly mortgage payment.
The day before the closing
You can obtain your HUD-1 settlement statement 24 hours before the closing. That's the official document listing all the funds payable at the closing, including loan fees, points, real estate commissions and the initial escrow amount. It may differ from the Good Faith Estimate, so review it carefully.
At the closing
The closing can take place at the lender's office, an attorney's office or even your home. In addition to you and your attorney (if you have one), the parties present may include the lender's representative, sometimes the loan officer and the title closer. Signatures will be collected for all the loan documents, including the HUD-1 statement, the mortgage or deed and the promissory note. Finally, you'll submit the cashier's or certified check if you're paying closing costs upfront. The process typically takes an hour or so.
WHERE TO FIND HELP: RESOURCES
The Long Island Housing Partnership, a nonprofit housing agency in Hauppauge, offers budget, credit and mortgage counseling. Call 631-435-4710, www.lhp.org
Housing Help, Inc. in Greenlawn is a nonprofit housing agency that provides services to low- and moderate-income households in the Town of Huntington. Call 631-754-0373.
Family and Children's Association in Hempstead offers counseling in English and Spanish. Call 516-292-1300, familyandchildrens.org
GreenPath Debt Solutions in Jericho offers free counseling and a fee-based debt management program. Call 888-860-4167, greenpath.com
La Fuerza Unida, Inc. in Glen Cove offers housing help in English, French, Portuguese and Spanish. Call 516-759-0788 ext. 12, lfuinc.org
Economic Opportunity Council of Suffolk, Inc. in Patchogue offers housing counseling and foreclosure prevention services. Call 631-647-3762, ext. 201, eoc-suffolk.com
Town of East Hampton - Office of Housing and Community Development is located in Amagansett. Call 631-267-7896 or visit town.east-hampton.ny.us/Housing.cfm for a list of helpful housing links.
American Debt Resources in East Northport offers financial education, housing counseling and debt management. Call 631-912-9542, ext. 110, americandebtresources.com. Counseling is free. For the debt management service, there is a $75 enrollment fee and a monthly service fee of $25 for five accounts or less, or $50 for six accounts or more.
Money 101 is a free workshop offered by the Nassau County Executive's Homeownership Center, which offers foreclosure assistance, helping homeowners negotiate with lenders to avoid losing their homes. This four-session program covers the basics a person should know about their finances, and how to establish or repair credit. Call 516-572-1903.
Financial Fitness, Health and Wealth is a class offered in Freeport and Centereach by the Community Development Corporation of Long Island, covering subjects such as money management, savings and establishing or repairing credit. There's a $25 materials fee. Call 631-471-1215, ext. 133, cdcli.org.