What To Expect When Refinancing

Refinancing your mortgage now may allow you to capture the lowest interest rate of your lifetime. But unlike a couple of years ago, when it seemed as though all you needed was a social security number and a pulse, today's process can be tedious. That's because the demand for refinancing is high, guidelines are strict, and the number of people processing mortgages is down. If you are willing to be patient, provide full documentation & probably jump through a few hoops then you should be able to acquire a great deal on a low interest, long term fixed rate loan. Here's what you should know before you refinance.

What's the outlook for rates?

No one knows exactly where rates will be going, but the assumption is that they will have to head upward. The real question is when. Expect the 30-year fixed rate to hover near 5% for the rest of this year, and as we get further inflation data expect these rates if anything to possibly creep upward. Right now financing for 30 year Fannie Mae & Freddie Mac loans up to $729,250 is extremely competitive with rates under 5% available.

Who qualifies for the best rates?

If you're taking out a conforming loan (loan amounts under $417,000) or a jumbo-conforming loan (loan amounts from $417,001 up to $729,250), and if your credit score is at least 720 with equity of 20% or more, typically you will get the lowest rate on loans backed by Fannie Mae or Freddie Mac. Other factors that will help are if the property you're refinancing is the single-family home you live in, if you don't take out some of your equity in cash when you refinance, and if you don't take out a home-equity loan or line of credit.

What documents will I need?

When you apply to refinance your mortgage, you must provide pay stubs from a recent month, two months of bank and other financial statements, two years of W-2s and, if you're self-employed, two years of tax returns showing self-sustaining income. This is quite a change from just two years ago when the majority of loans were processed with little or no income documentation. Another step you may take to speed up the process is to get your application in the hands of your mortgage broker & order your appraisal as soon as possible. As of May 1, 2009 all Fannie Mae & Freddie Mac loans must have appraisals completed by their approved appraisers as part of a new initiative to regulate lending further called HVCC, or Home Valuation Code of Conduct.

These new regulations as part of HVCC are making borrowers wait longer to be able to lock or fund their loans. This is due to the additional steps in the appraisal process, appraisers slower than normal turn times & a general lack of knowing where a homes value may come back on any given appraisal – which makes it difficult to lock in a loan when you are unsure if you even have the necessary value to complete the refinance. For best results my advice is to get your application in to your broker asap, order your appraisal and be patient.

Should I lock in the offered rate?

Locking in a rate is a good idea for a couple of reasons. First, if the mortgage pushes the limits of what you can afford, you want ensure that rising rates won't ruin the deal. Second, the risk that rates will change before the deal closes is higher these days because loans are taking so long to process. Because mergers and layoffs have decimated many lenders' staffs, refis are taking an average of 60 days to close.

Of course, rates may decline further. Working with a broker allows you the security to lock in the best possible rate, but also the flexibility that if rates, terms or approval were to change you still would have the option of going elsewhere without needing a complete new application & all other paperwork involved.

How much equity must I have?

Fannie and Freddie require a minimum of just 5% equity in your home. However, you must get private mortgage insurance if you have less than 20% equity. Right now, obtaining PMI for loans above 85% is nearly non-existent, so although Fannie & Freddie will allow for you to borrow that money, you may have to get creative to complete the transaction.

During the boom years, homeowners avoided PMI by taking piggyback mortgages -- for example, a first mortgage for 80% of the home's price and a second mortgage for the balance. That tactic has almost disappeared.

Buyers & existing homeowners are using some creative tactics to abate this expensive and typically non-deductible mortgage insurance. The most common way we see people being able to avoid mortgage insurance is by coming up with the difference in cash – typically borrowed. Many will borrow against their 401k or retirement vehicle as the repayment on those loans typically are much cheaper than the mortgage insurance payment. Also, you can borrow from family if possible, or if you are buying the home can ask the seller to carry the financing, in which case the person selling you the home becomes the lender in 2nd position. There are many options to try and avoid mortgage insurance so contact your mortgage professional to discuss the options available to you.

I'm underwater on my mortgage and my payment is killing me. What can I do?

Small consolation, but you have a lot of company: One in five homeowners now owes more than their home is worth, according to First American Core Logic. The goal here isn't necessarily to lock in the lowest interest rate, but simply to qualify to refinance with a mortgage you can afford. You may have two options, presuming that you have a job and meet other qualifications.
The first is the Home Affordable program. Announced in March by the Obama administration, this helps homeowners who owe more than their home is worth and need a more affordable payment. The Home Affordable refi will feature a market rate of interest that's fixed for at least five years.

It's no magic potion however. You'll qualify only if Fannie Mae or Freddie Mac owns your current loan (to find out more, visit http://www.makinghomeaffordable.gov/). The loan amount can't exceed your home's value by more than 5%. That limit disqualifies plenty of homeowners in distressed markets in California , Arizona , Nevada and Florida , where home values have plummeted. This program will end in June of 2010.

The second is the Hope for Homeowners program. This may help if you're at risk of default or already in foreclosure or bankruptcy. So far, these FHA-insured loans have had relatively few takers (recently only 51 of the loans had closed). That's because the cost is high for both lenders and borrowers -- although hopefully less onerous to both than the cost of foreclosure.
The Obama administration has proposed fixes to the program to make it more effective, including easing eligibility requirements for borrowers and reducing their costs. For more information about eligibility and where to apply, visit www.hud.gov/hopeforhomeowners.