Refinancing May Be Difficult for Some
December 7, 2007
As yields on US Treasury securities fall, many savvy homeowners expect mortgage interest rates to fall as well. This, on the surface, would seem like a good time to refinance from a higher rate to a lower rate. For some consumers, that plan is working out, but for many others it is not.
One of the issues that many homeowners are finding as they try to refinance their mortgage loans is that the rate difference and thusly the savings are not at a level that they had expected. Other homeowners are finding that they are all but cut out of the possibility of a refinance because of tighter lending practices being instituted by banks and other mortgage lenders.
For some time now, the yields on the benchmark 10 year Treasury notes have been dropping. In fact, they have recently reached new lows historically. With this big drop they are now low enough that they can affect mortgage rates, which are also beginning to come down.
While it would seem that lower rates are a good deal for homeowners, many mortgage lenders are still struggling from increased mortgage defaults and foreclosures. Because of this, they are becoming far stricter about lending. In many cases, they are also demanding higher risk premiums. Risk premiums are the amount above the Treasury rates that borrowers have to pay in order to absorb some of the risk in the event the loan is not paid in full. These added precautions are being asked even of the best borrowers.
These added costs are also one reason why homeowners who wish to refinance are simply not seeing the savings that they had expected.
For those homeowners who are in markets where home values are decreasing the problems become even worse. These homeowners are often required to have the best credit in order to get the best refinance plans. Lenders are also becoming much more diligent in the appraisal process, which was one of the reasons that the sub-prime market became so troublesome.
Homeowners looking for refinance should not be surprised it they are asked to get new appraisals on the home and for these appraisals to be conducted by qualified professionals whose integrity is solid. An unhealthy practice that was conducted during the sub-prime heyday was to appraise homes for more than they were worth. Lenders are now wise to that tactic and are doing their best to avoid being misled by inflated appraisals.
It is becoming more apparent that borrowers with the best credit history and equity in the home are having the best luck with refinancing to lower rates. Banks and other lenders are looking for the more traditional type borrower, and those are the ones with good credit histories and equity.
This does not mean that those with less than stellar credit will not be able to refinance, it simply means that they will probably not qualify for the best rates. In some cases, the hassle and the cost of the refinance itself make the deal a non-starter.
The one piece of news that applies to all those seeking to refinance or to borrow from the equity of the home is to shop around. A good place to begin is with those banks and credit unions that keep their mortgages in house. These institutions may be able to offer better rates simply because they are not under the constraints other lenders who sell off mortgages are under. These lenders may also have more capital on hand to help with refinance customers as well as with those who are looking for home equity loans.
Again, it should be noted that lenders are now being more careful as to whom they will lend to in these troubled times. Homeowners with spotty credit histories may find that they have to do a lot more shopping in order to get a rate that fits their needs and expectations. In some cases, depending on the credit history and the location of the home, they may find it impossible to get the refinance rates that they want.
Most experts agree that if a person wants to refinance the time to get started on the process is now. It is generally expected that the lender’s standards will only become more stringent as time goes by. For those looking to refinance within the next three to six months, they should begin exploring their options now. It is entirely possible that those who qualify today may not qualify in the future.
For those who need to do some work on their credit histories, and for those who have homes in declining market areas, waiting until later may be the best course of action. As of right now, many lenders are in a state of flux as to what their guidelines are or should be. With the passage of time, these will begin to settle down again and for those who can wait it out the rewards might be far more superior than they are now