Why It's Hard to Refinance Your Mortgage in Today's Market
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It's a sad but true fact: the United States economy has hit a very rough patch. A few years back, lenders were making risky mortgage loans to people who did not qualify under normal circumstances. They were offering interest-only payment loans or loans at a very low rate for a set period in order to qualify those risky borrowers.
Flash forward to early 2008 and those "risky" homeowners could not make the payments on those loans when they adjusted to the full principal and interest payment. The banks who purchased those risky loans (commonly referred to as subprime loans) were foreclosing and taking huge losses. Next thing you know the banks themselves were in financial trouble, which meant less credit available to homeowners, consumers and businesses across the country. That leads up to where we are right now, and it's part of the reason it's so hard to refinance a mortgage loan right now.
Why It's Hard to Refinance
So what does all this have to do with you wanting to refinance your home? For one thing, banks have less money available to lend, so their lending requirements have gone back to the pre-housing boom levels. Today, many lenders will only refinance mortgages for the highest qualified homeowners with plenty of steady income, low debt-to-income ratios and (most importantly) lots of available equity.
You may fit most of those requirements, or so you think. If you purchased a home for top dollar in a real estate market that has seen a steady decline in home values, you may have some trouble getting your current mortgage financed.
For example, lets assume that I purchased a home five years ago for $550,000 with a down payment of 5% percent (or $27,500). Back then, lenders would have been happy to finance 95% of my purchase price, which would have given me a mortgage of $522,500 ($550,000 minus my down payment). I probably would have been offered an interest rate higher than I'd like, due to the fact that I only put 5% down.
So let's just say my current mortgage interest rate is 8.75%. I've seen a lot of information on television and in the newspaper that rates are at an all-time low, so I decide that now is the time to refinance my mortgage! After all, my credit is good, my income is solid, and my debt is very low. So no problem. I should be able to refinance with ease. Right? Wrong...
My bank sends out an appraiser to come up with the value of my home in today's market and the news is not so good. Based on comparable sales in my neighborhood, they appraiser determines that my home is currently valued at $450,000. Even if the new lender was willing to finance 95% of my homes' value, this would mean a new mortgage of $427,500 -- hardly enough to pay off the balance of my current mortgage (which is in the neighborhood of $518,000).
Keep in mind, this is a generous scenario. Most lenders will now only finance up to 80% of the value of the home. In the scenario above, that would only equate to $360,000 worth of financing, for a shortfall of almost $160,000. This means no refinance is in the cards for me at this time.
Of course, I used the word "hard" in the title of this blog post for a reason. While it may be hard to refinance in the current market, it's certainly possible in the right situations. There's only one way to find out. You have to get a refinance quote from multiple lenders and see what they're willing to offer.
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Labels: refinance
posted by Brandon at
3:32 PM
