Is Now the Time to Refinance Your Mortgage?
Guaranty Trust is trying to get valuable information out to all homeowners who are contemplating a refinance and are not sure if now is the right time. We have all heard that when you inquire about a refinance, you should try to reduce your interest rate by 1-1.5% for it to be financially prudent. This is no longer the case. Because of new lending standards and guidelines put into effect by the Federal Government, closing costs on refinance loans are MUCH LESS than what they used to be. The result is that you are able to recoup the closing costs in a much shorter time period, thus, you do not need as much of an interest rate reduction to make it worthwhile.
Above and beyond interest rates and closing costs, there are 3 much more serious factors that EVERY homeowner needs to take into consideration:
(1) All loan programs are based on the value of your home at the present time. We are very concerned about the impending guideline changes that our Federal Government is planning on implementing because these changes will LOWER the amount of money you can borrow against your home’s value at the time you refinance. They are seriously considering lowering the loan to values to 80-85%, which will eliminate the customer’s ability to get a loan because home values are continuing to decline. Customer’s that are in “less favorable financing”, (ARM loans, interest only loans, etc) will be stuck in these loans because their home will not appraise high enough in the future to be able to refinance them. Click here to calculate your current LTV.
(2) FHA loans: The government raised the cost of the monthly mortgage insurance charge for both 15 and 30 year term loans on April 18th. It is reasonable to believe that these premiums could continue to rise. FHA is also, just like conventional, weighing their options for decreasing the loan to value ratios.
(3) Freddie Mac (FHLMC) Relief and DU REFI PLUS (FNMA) loans: These are loan programs that were created to help homeowners whose loans are owned by these entities be able to refinance through a streamlined process (sometimes without an appraisal). FNMA and FHLMC do not directly service loans. Lenders such as Bank of America, Chase Manhattan, Wells Fargo, etc. simply service these loans for FNMA and FHLMC. You may have a loan owned by FNMA and FHLMC and not even know it (find out here: FNMA, FHLMC). The Freddie Mac relief program was discontinued May 10, 2011. This is the FHLMC equivalent of the FNMA DU REFI PLUS. We suspect announcement is forthcoming soon regarding the termination of the DU REFI PLUS program. FNMA and FHLMC are separate entities, however, their guidelines and procedures mirror each other, and both are under the control of the Federal Government. If you have a loan that is owned by FNMA, a refinance now could save you thousands of dollars (or even avoid a declination of your application) later. Both of the aforementioned programs were designed to help homeowners with little or no equity left in their homes refinance into better rates and terms.
If you are in a loan that is at an interest rate of more than 5.5%, or if you are wanting to refinance to a loan with a shorter term (ie: 15 years), please take the above into consideration. These guideline changes are going to leave a lot of homeowners stuck in their current loans because home values are still declining and the guideline restrictions that are being implemented (reducing the amount of money you can borrow against your home) will prohibit you from qualifying for a refinance in years to come, or, at the very least, make it a whole lot more expensive because you will have to utilize PMI (private mortgage insurance) to be able to qualify.
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