August 14, 2022

Mortgages: Changes in Refinancing

Two-thirds of mortgages being written these days are refi’s, according to the Mortgage Bankers Association. Assuming your credit scores are strong, deciding whether to jump in as well may be a matter of numbers; there are plenty of Web calculators to test the what-ifs, like the ones at Interest rates are teasing new lows, at 4.49 percent, on average, as of Thursday for a 30-year fixed-rate loan, according to Freddie Mac.

If you grabbed a record-low rate late last year, or almost-as-low rates in mid-2009, you may decide to sit this one out. Otherwise, the average outstanding home loan still carries an interest rate of about 6 percent, according to Frank Nothaft, the chief economist at Freddie Mac. “It continues to be an attractive time for people to refinance if they haven’t taken advantage of it already,” he said.

Market changes are especially striking for those borrowers with loans taken out before the 2008 financial crisis. “They’re shocked at how much less the house is worth; they’re shocked at how much documentation we have to get; and they’re shocked at how much they have to sign,” said Matt Hackett, the underwriting manager at Equity Now.

First, don’t assume you’re going to take cash out. In the first three months of 2011, just a quarter of refi borrowers did so, according to Freddie Mac. On average, 62 percent of refi’s over the last 25 years involved getting cash out.

About half of borrowers now keep their loan balance about the same, and 21 percent cut that balance. Some want to cut debt, but others are putting in cash because the dwindling value of their home means they don’t have 20 percent equity, and the extra cash increases equity, the way a bigger down payment does.

Others want to get their loan below $417,000 to take advantage of the lowest rates, according to Philip Merola, an executive vice president of Mountain Mortgage Corporation, a lender in Union, N.J.

People still do take cash out for things like college tuition, Mr. Merola said. But the equity has to be there — don’t expect a loan for more than 80 percent of the current appraised value.

And if you don’t have equity? If your loan is insured by the Federal Housing Administration, consider an F.H.A. Streamlined Refinance, which may not require a new appraisal. There’s also the government-backed Home Affordable Refinance Program, designed for loans that have little or negative equity.

Also bear in mind that you’ll need more documentation. Expect to document all income, assets and debts. In fact, you can expect the lender to go beyond the application, said Michael Moskowitz, the president of Equity Now. Borrowers sign an Internal Revenue Service Form 4506, which allows a lender to get tax returns.

In the past, lenders used returns for quality control after closing, if they looked at them at all, Mr. Moskowitz said. But now his company reviews all tax returns. For instance, he said, a money-losing side business will show up, thus reducing the borrower’s income.

Finally, remember that disclosure forms have changed. As of last year, lenders were required to provide a revised Good Faith Estimate form aimed at making terms more transparent. One key update: In the past, some closing-cost estimates were fairy tales. The new form specifies fees that can’t change between estimate and closing, fees with changes capped at 10 percent, and others that can grow more.

Mr. Hackett warned that some lenders, when they haven’t technically accepted a loan application, fudge on estimates with informal “initial fees worksheets” they provide. Some people think they have a good-faith estimate in such cases, he said. But fees aren’t capped.

One thing that hasn’t changed, said Mr. Nothaft: “It will still come across as a thick wad of paper with a lot of forms to sign.”

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