Applications for mortgage refinancing tripled in early December on news that the US Federal Reserve will buy up to $600 billion of mortgage debt. BusinessWeek personal finance editor Lauren Young spoke with mortgage guru Keith Gumbinger, of HSH Associates, a financial publisher, about the refinancing climate.
Mortgage rates have already fallen, should homeowners wait for a new Government program to push rates even lower?
If we crack 5 per cent - which would be a 50-year historic low - and stay there long enough, there are many millions of mortgages that can be refinanced profitably. But the lenders' staffs are already very thin. If you have a target interest rate in your head, shop around now for a mortgage lender that will hold onto your application so the paperwork is ready to go if rates fall.
How easy is it to refinance now?
You generally need to have an equity stake of at least 20 per cent in your home. In the most challenged markets, you need much more. You don't need a flawless credit record, but you need a credit score of 720 to access the lowest interest rates.
You must fully document income and assets, which is very different than a couple of years ago. Back then you could walk into a lender merely breathing and they would say, "Great, here's your loan." Your debt loads relative to income have to be smaller now.
At the height of the boom, those ratios - which include housing payments and other debts longer than 10 months - were as high as 55 per cent. Now you generally can't have a debt ratio higher than 43 per cent.
Is there relief in sight for borrowers who want to refinance jumbo adjustable-rate mortgages but have been shut out of the market?
People got paranoid about adjustable-rate jumbo mortgages, or mortgages that exceed $417,000, about a year ago. So many people have them, and there were worries people wouldn't be able to cover mortgage payments if they reset at higher rates.
But now there has been a 180-degree turnaround. For example, the popular 5/1 jumbo adjustable-rate mortgage, which has an initial interest rate for five years and then resets annually, is averaging 6.60 per cent. The traditional 30-year fixed is 7.49 per cent.
So even if you want to get out of a jumbo adjustable-rate mortgage and into a fixed-rate mortgage, now is not the best time to refinance. Ride it out, and you will probably save a few bucks if rates go lower.
Considering so many lenders have gone out of business, how do you work the system to your advantage?
Funding is uneven across the market. Some lenders are more capital-impaired than others, and their rates may be higher. My advice is to look across your marketplace and leave yourself a sufficient amount of time to shop around. If you've worked with a mortgage broker in the past, keep in mind that mortgage brokers rely heavily on wholesale lenders (such as major banks and specialty finance companies), and those lenders have basically shut their doors and gone away. As a result, there are fewer funding sources for brokers.
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