YOUR MONEY: Many families will have chance to refinanceAfter losing his truck driving job in December and taking a pay cut when he landed a new job, Mark Lambert would love to trim a few hundred dollars off his $1,755 monthly mortgage payment by refinancing to a bargain-basement interest rate. It's not going to happen.
By: Susan Tompor, Detroit Free Press
After losing his truck driving job in December and taking a pay cut when he landed a new job, Mark Lambert would love to trim a few hundred dollars off his $1,755 monthly mortgage payment by refinancing to a bargain-basement interest rate.
It's not going to happen.
He and his wife owe $193,000 on their house near Fenton, Mich. The house — appraised at $225,000 in 2001 — is now worth $148,000 because Michigan's economy tanked and took home prices down with it.
"We're way upside-down," said Lambert, 51.
Everybody wants to save a buck, and refinancing would seem to be a no-brainer when the 30-year mortgage rate is around 5.23 percent. It's not.
Still many families, unlike the Lamberts, can take advantage of great refinancing opportunities this spring. There is a surge of activity.
But others must understand that it's far tougher to refinance than it once was, some fees are higher, and President Barack Obama's program won't help everyone who has trouble refinancing because home values are so low.
"Be realistic, not wishful," suggested Tom Kelly, a spokesman for Chase. "Get yourself a good sense of what your house is worth."
Thanks to the tough economy and falling housing prices, a lender today is typically going to want a homeowner to have 20 percent equity in the home to refinance that mortgage. If you had a $193,000 mortgage, the house would have to be worth at least $241,250 or so.
Under the Obama plan, there is more wiggle room if the loan-to-value is between 80 percent and 105 percent. Under that plan, a refinancing could be done if the house was worth as little as $183,809 if the owner had a $193,000 mortgage.
If you're able to refinance, you can save some money and refinancing an ARM now can avoid future headaches.
"A lot of ARMs are resetting to lower rates this year, which has the potential to lull borrowers to sleep," warned Greg McBride, senior financial analyst at Bankrate.com.
But he said homeowners with ARMs should refinance to a fixed rate to avoid the risk that rates and their monthly ARM payment could skyrocket in a few years.
Should homeowners wait until rates tumble even more?
First, rates are extremely low now. Second, you're gambling on home prices.
"You could win the battle but lose the war if the value of your home continues to fall, making you ineligible to refinance regardless of what happens to rates," McBride said.
To find out if you qualify for the Obama plan, call the company that sends you a mortgage statement each month and ask if you have a Fannie Mae or Freddie Mac mortgage. Or see www.fanniemae.com and www.freddiemac.com. Or call: 800-732-6643 for Fannie and 800-373-3343 for Freddie.
Also, the homeowner must continue to make monthly payments. The plan is limited to primary residences and applies only to first-lien loans.
The Obama plan could enable some homeowners — who otherwise could not do so — to refinance to lower rates of 4.75 percent to 5.25 percent from rates of 6.25 percent or higher.
If you can't qualify, like the Lambert family, talk to your lender about a loan modification. You'd need to have trouble paying your bills and show a financial hardship.
Chase began taking Obama plan applications April 6, and is refinancing those with mortgage insurance and their mortgage with Chase.
Bank of America is not refinancing home mortgages with mortgage insurance at this time under the Obama plan. The bank said the U.S. Treasury must issue more guidelines relating to loans with mortgage insurance.
Rick Simon, a spokesman for Bank of America, said the bank is taking applications under the Obama plan for consumers who do not have mortgage insurance. Perhaps someone put down 20 percent when they bought the house — and did not have to buy mortgage insurance — but then saw the home value tumble.
Other lenders are not taking Obama plan refinancing applications yet.
Whether consumers refinance on their own or do so with the Obama plan, McBride warns that refinancing today typically will cost more. The higher fees are largely a result of costs being levied by Fannie Mae and Freddie Mac.
Owners must consider the costs and weigh how long they're going to stay in the house.
WHAT TO DO IF YOU'RE PLANNING TO REFINANCE YOUR HOME
— First, talk to the lender that holds your mortgage now if you want to refinance.
— Know the value of your home and how much you owe on it. If you owe far more than the house is worth, it will be impossible to refinance the mortgage, even with new federal programs.
— Get an estimate of the costs of refinancing. If you're going to live in the house for just two or three years, it may not be worth the extra cost that you'd pay in fees for refinancing.
— Know what your rate is now on the mortgage — and if you have an adjustable rate that could reset in a year or two. Greg McBride, a senior financial analyst at Bankrate.com, says it's better to lock in today's low rates, if possible, than risk an adjustable-rate mortgage resetting at a much higher level in a few years.
— If you're likely to retire in a few years, you might want to refinance to shorten your mortgage to 15 years or less.
— Are you close to having 20 percent equity in your home? If not, you might consider bringing more money to the table to bring your equity up to 20 percent to possibly qualify for a lower mortgage rate and avoid paying private mortgage insurance.
— Be especially cautious about potential mortgage-relief scams. According to the Federal Trade Commission, mortgage-modification schemes often guarantee a high success rate, charge upfront fees for services and often fail to keep their promises. See www.ftc.gov.
— If you can't refinance and are interested in modifying a loan, consumers are urged to visit www.MakingHomeAffordable.gov or call 888-995-4673 for free help.
How much can you save with a refinance now?
Take someone who borrowed $166,000 in June 2002 at 6.5 percent and has a payment of $1,049.23 a month. If he or she refinanced the $150,000 balance now, Bankrate.com said the rates and payments would be:
— For a 30-year fixed-rate loan, the rate could be 5.23 percent. Then, the payment would be $826.45, or a savings of $222.78 a month.
— For a 15-year fixed at 4.76 percent, the payment would rise to $1,167.52, or an increase of $118.29 a month. The homeowner would build equity far sooner, though, and have the home paid off more quickly.
(Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at email@example.com.)