Refinancing When You're Underwater

 

If your home is  worth less than what you owe, you’re underwater, and that’s not a fun place to be, especially with interest rates at historic lows.

You can make the payments, but you’d rather not spend that much on them.  Here’s what you can do.

Step One: Are you really underwater?

Housing prices have gone up in a number of areas.  Your home may have crossed the threshold.  Or perhaps you received a low appraisal when you purchased the home.  (Please see our other blog post on tips for increasing your appraisal value.)

 

 

Step Two: Are you current on your payments?

If you can show that you’re a good lending risk and all of your obligations are current (see our post on your credit score), lenders tend to be more flexible as you’re not a credit risk.

Step Three: The details

First, figure out who guarantees or owns your mortgage.  If it’s backed by  Fannie Mae, Freddie Mac, FHA, VA or USDA, then there’s a good chance you can refinance.
There is a Federal program called The Home Affordable Refinance Program (HARP) part of the Making Home Affordable program.  They have certain requirements for refinancing:

• You are the owner-occupant of a one- to four-unit home.
• At the time you apply, you are current on your mortgage payments.
• The amount you owe on your first lien mortgage does not exceed 125 percent of the current market value of your property.

If your loan is backed by the FHA, you will want to look into the FHA Streamline Refinance program.  Their requirements are:

• You will not have made a late payment in the past 12 months.
• You will not have completed an FHA Streamline Refinance in the prior 6 months.

If you’ve financed with Veterans Affairs (VA), then you will want to find out more information about that Interest Rate Reduction Refinancing Loan (IRRRL).  Their only requirement is:

• You must refinance into a loan with a lower interest rate unless you are refinancing into a fixed-rate mortgage from an adjustable-rate mortgage (ARM).

And if you’ve been guaranteed by the USDA, there is a pilot program (only available in AL, AR, CA, FL, GA, IL, IN, KY, MI, MS, NV, NJ, NM, NC, OH, RI, SC and TN) called the Single Family Guaranteed Rural Refinance Pilot.  Their requirements are:

• You will not have made a late payment in the past 12 months.
• Your current mortgage rate must be 100 basis points higher than the refinance rate. Example: If your current interest rate is 6 percent, you would need to refinance into a rate that is equal to or lower than 5 percent.
• Make sure you contact your current servicer or the USDA Rural Development Office.

What If I’ve Missed Some Payments

Sometimes, things happen.  You had the flu and forgot to schedule the payment until it was considered late.  Money was tight.  We’ve all been there.  There is a program as well called the Home Affordable Modification Program (HAMP)

The Last Step

The final step for all of the options is to contact me and inquire about your eligibility.  As a Loan Officer, I am trained in all of these programs and monitor the rates to find the best options for you.

Why Mortgage Rates Change So Much

 

Did you ever wonder why mortgage rates fluctuate so much and you’re encouraged to lock in a rate?  Why can’t they just stay the same for a few weeks or a few months.

They’re a little like stock prices in that they change based upon supply and demand, and the rates are affected by inflation rates.  Additionally, they are impacted by the secondary mortgage market.

What Is the Secondary Mortgage Market?

The secondary mortgage market is where loans and servicing rights are sold by market leaders Fannie Mae and Freddie Mac, and also purchased by investors such as mutual fund companies, banks, hedge funds, and teacher and municipal pension funds.  (see more information in this Yahoo! Homes blog post)

What are the other things that impact the rates?

From Homeguides in the San Francisco Chronicle:

Growth

The economy naturally grows and shrinks and is very sensitive to events within the economy as well as outside the economy.  When the economy is on a growth path the demand for money increases and interest rates are pushed upward. The opposite is true when economic growth slows or stops.

Inflation

A key concern during periods of economic growth is inflation. Inflation increases prices and deteriorates spending power in the economy, which slows growth. The implication for future homeowners is that inflation pushes mortgage rates higher as lenders increase interest rates to hedge against the effects of inflation on profits, making home buying more expensive.

Federal Reserve Board

Economic activity is measured nationally to determine the appropriate interest rate.

Money Supply

Although the Federal Reserve is unable to directly set interest rates, the agency can influence rates indirectly by increasing or decreasing the supply of money in the economy. By increasing the money supply, the Federal Reserve puts downward pressure on interest rates. Decreasing the money supply puts upward pressure on interest rates. Consequently, if the Federal Reserve decreases interest rates, mortgage rates come down and borrowing for a home purchase is cheaper and encourages home buying.

We’ve written posts on how this is going to impact not only mortgage rates but fees that are charged.  With all of these factors, rates can change frequently.

So What’s This Mean For You?

Work with a reputable mortgage loan officer.   A good loan officer will diligently monitor interest rates for their clients, and advise them of opportunities to manage their mortgage debt at a better rate. They will also let you know up front about industry trends that may impact your rate, and offer recommendations as to the best time to lock in a rate during the process.