Time to refinance is NOW
Article from MSN
Time to refinance is now
Even if your loan isn't going to reset in the near future, there are good reasons not to wait. Sinking home values eat into your equity, making it harder to get a new loan.
By Liz Pulliam Weston
Rates on 2 million mortgages are scheduled to rise by the end of 2008. If yours is one of them, consider refinancing now -- if you can.
Falling home values are eroding people's equity rapidly enough that some who can refinance today might not be able to do so in a year, notes mortgage expert Dick Lepre. Even those who have plenty of equity now may face more limited options and higher costs in a few months.
That's because much of the refinance math lenders do depends on how much equity you have in your home:
If your mortgage and other home loans equal 80% or less of your home's worth, you'll typically have the most choices and be offered the best rates, contingent on your credit scores.
As your equity shrinks, though, rates tend to get higher and terms get stricter, said Lepre, a California loan officer who writes a weekly newsletter on the mortgage business. Every time you slip over an equity benchmark -- 85%, 90% and 95% -- rates tick up and your options decrease.
Once you owe more on your house than it's worth, your alternatives pretty much decline to none, at least in today's mortgage market. Lenders who were once eager to make 100% or more loan-to-value mortgages have either gone out of business or turned away from these high-risk loans.
Risk is in waiting, not acting
What a difference a few months makes. In the recent past, the only folks who had to worry about not having enough equity to refinance were those who had already gobbled it up with home-equity borrowing. Even that was a temporary situation, as ever-rising home values continued to supply more equity.
Now that home prices are dropping in many areas, the easy equity gains have turned into equity erosion. Someone with a $200,000 mortgage would have an 80% loan-to-value on a home worth $250,000, but if that home drops 10% in value, to $225,000, the same loan now represents 89% of the home's worth.
Another glitch: Appraisers are getting more
conservative, in response to pressure from lenders.
If an appraiser decides your home is worth $220,000 instead of $225,000, you've risen above the 90% loan-to-value mark and will find your refinancing options further reduced.
Lepre worries that many folks who should be refinancing are sitting on the sidelines, hoping for lower rates. That might be a gamble worth taking if real-estate values are still strong in your area and the supply of unsold homes isn't building. If prices have already tumbled or there's more than a six-month supply of homes on the market, though, he'd opt for refinancing now.
"The risk they're taking is that rates will be no worse in a year, but their house will be worth less than it is today," Lepre said.
Shake-out may take a few years
How do we know home values will be less next year? We can't know for sure, and in some still-strong markets they might still be inching up.
But both Lepre and I have been through real-estate recessions, so we know things can get pretty bad before they get better. So has commentator Scott Burns, who noted in "Housing horror could hang around for years" that home prices in many Texas and California cities took a decade or more to recover from their respective slumps. Lepre believes that many homeowners in declining markets might have to wait five years or more before their homes are again worth what they're worth today.
That's because foreclosures are almost certain to continue rising. One quarter of the households whose loans are resetting in the next year or so are at risk of foreclosure, according to the U.S. Department of Housing and Urban Development. Banks won't want to hold on to these money-losing properties, so they're likely to dump them at fire-sale prices -- further depressing values in the affected neighborhoods.
If you're considering whether to refinance:
- Do some math. Try to get a bead on what your house is worth now by asking at least three real-estate agents for "I need to sell it fast" estimates. A review of recent home sales in your neighborhood may help you establish a value and the price trend in your area -- up, plateauing, dropping, falling like a rock. Divide what you owe by what your house is worth to determine your loan-to-value ratio. Now do the math again, assuming home prices drop 10%. If the results make you queasy, you might want to start shopping for a new loan now.
- Consider fixing the interest rate for at least as long as you'll be in the house. Signing up for another loan that adjusts before you're ready to move just puts off the problem to a time when you may have less equity -- and less leverage.
What if you've already waited too long and don't have enough equity to refinance? If that's your situation, and you're having trouble making the payments, contact a HUD-approved housing counselor immediately to discuss your options. Read "Facing foreclosure? 9 options" and "Your lender doesn't want your house" for alternatives and strategies.
You also should contact your lender. Under pressure from regulators and lawmakers, some lenders are restructuring loans to fix rates and lower payments for stricken borrowers.
"Countrywide just announced plans to refinance or restructure mortgages for some 82,000 customers," said Elizabeth Razzi, author of "The Fearless Home Buyer." "Borrowers should definitely contact their current lender to see if they are offering an easier way to refinance."
Even if your loan isn't going to reset in the near future, there are good reasons not to wait. Sinking home values eat into your equity, making it harder to get a new loan.
By Liz Pulliam Weston
Rates on 2 million mortgages are scheduled to rise by the end of 2008. If yours is one of them, consider refinancing now -- if you can.
Falling home values are eroding people's equity rapidly enough that some who can refinance today might not be able to do so in a year, notes mortgage expert Dick Lepre. Even those who have plenty of equity now may face more limited options and higher costs in a few months.
That's because much of the refinance math lenders do depends on how much equity you have in your home:
If your mortgage and other home loans equal 80% or less of your home's worth, you'll typically have the most choices and be offered the best rates, contingent on your credit scores.
As your equity shrinks, though, rates tend to get higher and terms get stricter, said Lepre, a California loan officer who writes a weekly newsletter on the mortgage business. Every time you slip over an equity benchmark -- 85%, 90% and 95% -- rates tick up and your options decrease.
Once you owe more on your house than it's worth, your alternatives pretty much decline to none, at least in today's mortgage market. Lenders who were once eager to make 100% or more loan-to-value mortgages have either gone out of business or turned away from these high-risk loans.
Risk is in waiting, not acting
What a difference a few months makes. In the recent past, the only folks who had to worry about not having enough equity to refinance were those who had already gobbled it up with home-equity borrowing. Even that was a temporary situation, as ever-rising home values continued to supply more equity.
Now that home prices are dropping in many areas, the easy equity gains have turned into equity erosion. Someone with a $200,000 mortgage would have an 80% loan-to-value on a home worth $250,000, but if that home drops 10% in value, to $225,000, the same loan now represents 89% of the home's worth.
Another glitch: Appraisers are getting more
conservative, in response to pressure from lenders.
If an appraiser decides your home is worth $220,000 instead of $225,000, you've risen above the 90% loan-to-value mark and will find your refinancing options further reduced.
Lepre worries that many folks who should be refinancing are sitting on the sidelines, hoping for lower rates. That might be a gamble worth taking if real-estate values are still strong in your area and the supply of unsold homes isn't building. If prices have already tumbled or there's more than a six-month supply of homes on the market, though, he'd opt for refinancing now.
"The risk they're taking is that rates will be no worse in a year, but their house will be worth less than it is today," Lepre said.
Shake-out may take a few years
How do we know home values will be less next year? We can't know for sure, and in some still-strong markets they might still be inching up.
But both Lepre and I have been through real-estate recessions, so we know things can get pretty bad before they get better. So has commentator Scott Burns, who noted in "Housing horror could hang around for years" that home prices in many Texas and California cities took a decade or more to recover from their respective slumps. Lepre believes that many homeowners in declining markets might have to wait five years or more before their homes are again worth what they're worth today.
That's because foreclosures are almost certain to continue rising. One quarter of the households whose loans are resetting in the next year or so are at risk of foreclosure, according to the U.S. Department of Housing and Urban Development. Banks won't want to hold on to these money-losing properties, so they're likely to dump them at fire-sale prices -- further depressing values in the affected neighborhoods.
If you're considering whether to refinance:
- Do some math. Try to get a bead on what your house is worth now by asking at least three real-estate agents for "I need to sell it fast" estimates. A review of recent home sales in your neighborhood may help you establish a value and the price trend in your area -- up, plateauing, dropping, falling like a rock. Divide what you owe by what your house is worth to determine your loan-to-value ratio. Now do the math again, assuming home prices drop 10%. If the results make you queasy, you might want to start shopping for a new loan now.
- Consider fixing the interest rate for at least as long as you'll be in the house. Signing up for another loan that adjusts before you're ready to move just puts off the problem to a time when you may have less equity -- and less leverage.
What if you've already waited too long and don't have enough equity to refinance? If that's your situation, and you're having trouble making the payments, contact a HUD-approved housing counselor immediately to discuss your options. Read "Facing foreclosure? 9 options" and "Your lender doesn't want your house" for alternatives and strategies.
You also should contact your lender. Under pressure from regulators and lawmakers, some lenders are restructuring loans to fix rates and lower payments for stricken borrowers.
"Countrywide just announced plans to refinance or restructure mortgages for some 82,000 customers," said Elizabeth Razzi, author of "The Fearless Home Buyer." "Borrowers should definitely contact their current lender to see if they are offering an easier way to refinance."
