Why Not Refinance?
In many cases,
refinancing is quick, painless and reasonable, but there are
reasons to forego refinancing. Indeed, those with second
mortgages, a lot of debt or trouble with bills may find
they'd pay more by refinancing than by sticking with the
loan they already have.
Do Nothing?
One of the first things to consider when refinancing is, is
there enough equity in the property? A second thing would be
the borrowers own personal qualifications, and that goes
back to standard credit underwriting. It's important to
maintain a positive credit history and a good relationship
between debt level and income level.
Good to Go
For some, refinancing is a sure thing. Borrowers with
consistent on-time payments and relatively small debt can
knock as much as hundreds of dollars off their monthly
payments. Over time, that will mean thousands less spent on
interest, and possibly a mortgage paid off sooner.
But refinancing isn't for everybody. Many people today have
taken out second liens in the form of home equity loans and
lines of credit. Others have taken advantage of loans to
borrow up to 125 percent of their home value. These and
other factors will make it tough for people who go back, hat
in hand, to the mortgage company to ask for a refinance.
How it Works
Let's consider how a refinance loan works. In most cases,
lenders sell these products to Fannie Mae and Freddie Mac,
which repackage them as securities for sale to investors.
These agencies provide a large part of the money for the
lending industry, and they have relatively strict guidelines
for the loans they buy. With a plain vanilla "rate and term"
refinance, in which someone has only a first mortgage and
wants nothing more than to change terms or rate, lenders can
rework the loan with minimal effort, and possibly even a
streamlined refinance.
The Tricky Part
However, it's more difficult for someone who has obtained a
home equity loan within the past 12 months to refinance
their first mortgage. Lenders restrict overall debt,
including the first mortgage and the second, to 75 percent
of the home's value during this period.
Given that rates are low, many borrowers may want to
eliminate their home equity loans entirely by rolling those
debts into larger first mortgages. However, to do that, they
must have had their home equity loans for at least 12 months
and their total mortgage debt levels can't exceed 90 percent
of the home's value.
Keep an eye on the PMI penalty. Many who combine loans end
up back where they started with private mortgage insurance
-- an extra payment they must make when they borrow more
than 80 percent of a home's value. Here's a good example:
someone wants to combine a $15,000 second mortgage with
$75,000 worth of PMI-free first mortgage debt. Together, the
two loans raise the overall debt load on a $100,000 home to
$90,000 -- above the 80 percent level.
Basic Standards Still Apply
Refinancing customers face the same credit and
debt-to-income standards they did when applying for the
original loan. This can spell trouble if a once-stellar
customer has made some late payments or allowed the credit
card balance to skyrocket. Lenders also typically compare
the housing debt and overall debt to an applicant's gross
income when deciding whether to make a loan. If your income
has fallen, you may not get a low-interest refinancing -- or
yet none at all.
Research
You'll have to look at your existing payment, figure out the
costs of refinancing, and see how long it would take to
recoup the charges.
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