Credit Crunch

Looking for a little sunshine in a sky filled with storm clouds? With our economy in a tailspin, the silver lining is that mortgage interest rates are low enough to revisit whether refinancing would be a good financial move for you. Interest rates for 15-year loans are in the 4.5% range while 30-year mortgage rates can be found as low as 5%. 

That’s the good news. The bad news is that qualifying for these attractive loan deals has become quite a bit more challenging. Proving that they have learned their lesson, lenders have instituted new ‘risk-based mortgage pricing’ that’s full of potholes for would-be refinancers. At the center of the pricing strategy is your FICO score. The lower the FICO score, the higher your mortgage rate. One mortgage broker told me a 740 to 760 score was needed to qualify for the best loan offers. Lenders are also looking closely at the loan to value ratio. In many areas, home prices have dropped 15% to 20% or more, effectively squeezing loan to value ratios and making it impossible for many people to refinance their home. To aggravate the situation even more, many lenders are refusing to subordinate home equity lines of credit (HELOC) loans to the new refinanced first mortgage. For example, say you currently have a first mortgage of $275,000 at 6.5% and want to refinance to a 4.5% mortgage. You also have a $100,000 HELOC in place based on the bank’s prime lending rate (currently 3.25%). Assume that you do qualify for the 4.5% first mortgage; you are likely to find that the bank holding the HELOC will not agree to ‘roll’ the loan over. Instead, they may offer a higher rate, say prime plus 2%, and they may want to reduce the line from $100,000 to say $60,000. Now you have to decide if the ‘total’ loan package, both the first and second mortgage, save you enough money to make the deal worthwhile. 
What’s your best strategy? First, get your FICO score and credit reports from all three credit bureaus.   Review your reports to determine if any information is inaccurate. If you find inaccurate information, file a dispute report with explanation and documentation about why the inaccurate information should be removed. The credit bureau has 30 days to research and either confirm their information or remove it. Now, contact your mortgage broker and get an interest rate estimate based on your FICO score. Second, contact your bank and let them know that you are considering refinancing your first mortgage and ask if they will subordinate their loan under the same terms and conditions. If not, determine what the new rate and monthly payments would be. Knowing the approximate closing costs, interest rate and monthly payments for both the proposed new first mortgage and home equity line of credit, you’re ready to see if the deal makes sense for you. For help, go to the Resource Center at; click on ‘link’, then “Mortgage Refinance Calculator”.
Refinancing is not as easy as it once was, but by doing a little homework, you may be able to save hundreds, even thousands of dollars per year in payments. During these economic times, this can make a big difference!