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Should you refinance?
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Mortgage rates tapered off slightly this week after increasing dramatically at the end of May. According to Bankrate’s weekly national survey, the average 30-year fixed mortgage was at 5.76% last week, with an average of 0.43 discount/origination points.
The increase in interest rates has impacted refinance applications. Refinancing activity fell by 23.3% last week. Fortunately purchase activity only declined by 3.5%.
Whereas many homeowners took advantage of the low rates over the last few months, others were not as quick to act or were unable to do so at the time. The rate increase has eliminated the benefit of refinancing for many homeowners, but there are others trying to decide if refinancing makes sense.
Can you refinance? Should you refinance? These are the questions every homeowner needs to consider prior to initiating a mortgage transaction.
Can you refinance?
Whereas interest rates on the 30-year fixed mortgages are low, many homeowners are unable to refinance due to low credit scores or the loss of equity brought on by the housing market collapse.
The credit markets have constricted over the last couple of years. Housing values have plummeted nationwide. On a practical level, that means lenders are making fewer loans. If your credit score is below 620, or you have no equity in your property, then it will be difficult to find loan options at a competitive rate.
Credit: Request a free copy of your credit report from AnnualCreditReport.com. They do not provide a credit score on the free report, but you will be able to review for errors, inaccurate information and derogatory items, like collections and late payments.
There are fewer mortgage options in today’s market. Tight credit restrictions have been implemented by lenders. If the report looks fairly clean, then you will likely clear the 620 minimum credit score required by most lenders. For more information regarding credit and credit repair, click here.
Estimate of Property Value: Though consumers are well aware of the decline in home values throughout the country, they are often in denial about how that has impacted their property. I have spoken to many people who are convinced that their property has significant equity only to receive an appraisal showing a value below what they owe. Telling a potential client that they are ‘underwater’ on their largest asset is not news I want to convey. As a result, I have gotten in the habit of checking several online resources, on behalf of my clients, to establish a rough estimate prior to ordering an appraisal.
- Zillow: This site is my favorite. The ‘Zestimate’ gives you a specific value as well as a general range. I have found the actual appraised value tends to fall within the range provided as long as the property isn’t in a rural location or small town with insufficient data. Zillow is customizable: you can pick comparables in the area that are more similar to your property, add missing information, change errors in square footage, factor in home improvements/upgrades, check how potential upgrades will impact value and view city/town statistics. The confidence rating provided will let you know if the estimate is based on insufficient data in that area.
- RealEstateABC tends to inflate values slightly. The site is more difficult to navigate in terms of entering specifics regarding your property. It allows the user to set the market conditions at hot, average, cold, etc. These two variables lend themselves to optimistic value estimates.
- Trulia has extensive resources for determining value. They also provide community resources, like crime statistics and a Q&A forum, where you can get multiple answers from professionals and locals on any question or concern.
- Cyberhomes has a high rate of accuracy. They provide a more accurate quote than Zillow in areas with less data. It is easy to navigate.
- Home Gain will allow you to correct some features. They have realtors in 2500 zip codes providing comparables.
- EAppraisal They provide free home valuations and comparable data, including recent sales, market trends and community details. When you can get a value, they provide good information, but they are often hit or miss in terms of locating the property.
Should you refinance?
If you have great credit and sufficient equity, you can refinance. That doesn’t mean you should.
- You need to analyze the numbers. When refinancing with the sole purpose of reducing the payment/rate/term, a rate and term refinance, you want a reduction of 1% or more. Otherwise it isn’t worth the cost of doing the loan.
- If you are eliminating a considerable amount of debt, or taking out cash for improvements, it is considered a ‘cash-out’ refinance. You need to look at the net monthly savings, or net gain in equity if considering home improvements, and the total closing costs (less insurance/tax impounds) to figure out how many months it will take for the savings, or equity gain, to be equal to the cost of doing the loan. How long do you intend to be in the home?
- 720 is a solid FICO score, but it’s not good enough to obtain the best rates in today’s refinancing market. 740 is the new benchmark to get the best rates.
- Though you can get a loan with a credit score as low as 620, there are significant rate adjustments associated with credit scores and taking cash out when refinancing. A rate quote given without evaluation of your credit is meaningless. If you have an enormous amount of equity in the home, you can avoid the worst of the adjustments. How many people have an enormous amount of equity these days? Not many.
- FHA only allows borrowers to access 85% of the property value when doing a cash-out refinance. Technically conventional lenders have the same guideline, but PMI is required on all conventional loans over 80%. PMI companies will no longer insure cash out refinances. Thus, conventional mortgages, Fannie Mae & Freddie Mac, only allow borrowers to access 80% of the property value when doing cash out refinance transactions.
- When you are getting quotes from lenders, write down everything that you are told, including the name of the company, name of the loan officer, rates, fees, appraisal cost, etc. Most people do not keep notes when talking to lenders about options. It is easier to negotiate fees and spot irregularities if you have all of the pertinent information at your fingertips. Click here for my article on what to ask your lender.
- If you have impeccable credit, get a quote from your local credit union, as well as the major players. Local credit unions are a good source for competitive mortgages for borrowers with perfect credit. Often they waive closing costs for members and have access to very competitive rates.
- Get multiple quotes. The fees and points vary from lender to lender and from loan officer to loan officer. Obviously everyone wants to get the lowest rate at the lowest cost. Comparing quotes, and making lenders compete for your business, is a sound practice. Unfortunately there are liars, brigands and thieves in this industry. That is why it is imperative to take the time to get several quotes, take a lot of notes and ask each individual a lot of questions to insure they are telling you the truth rather that what they think you want to hear.
- If you decide to do a refinance, take the time to spruce up your home for the appraiser. Fix any obvious minor issues, paint rooms if needed, tidy up before their arrival and clean up the yard. Whereas your loan may look good on paper, the final product is determined by the appraisal. When you get an appraised value that is higher than anticipated, it is always good news. When the appraisal comes in lower than expected, it can impact the rate and terms that you were offered or kill the loan. See my article on what to ask the appraiser to insure you get a qualified professional with experience in your area.
Regardless of your reasons for considering a refinance, it is always a good idea to educate yourself before making any major financial decisions. Make decisions for the long run rather than the short term and never take the word of a person who profits by getting you to say ‘yes.’
Guaranteed Home Mortgage
Follow me on Twitter: @TheSolardiva
P. 866.626.4565, ext. 239
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