Week after week refinance applications continue to grow. Refinance applications are as high as they have been all year according to the Mortgage Bankers Association weekly report. It seems that a healthy refinance boom is beginning. The reason I say healthy is because of the pressure put on the government to help create a refinance boom by loosening underwriting standards for home loans allowing more homeowners to qualify. I am glad that this did not happen.
If the Obama Administration had loosened these standards, the door would once again be open to the problems which created the housing crisis in the first place. Now that refinancing has begun to rise on its own, I think we can all agree that letting the boom occur naturally was the right decision for homeowners and lenders alike.
So, who is doing all this refinancing?
With many homeowners struggling to make payments or dropping out of government modification programs, where is this boom coming from? The answer is likely those who have successfully modified loans or refinanced in the past 2 years. Also, those who have weathered the storm are now seeing their home values stabilized. These homeowners are looking to shorten their loan times and take advantage of extremely low interest rates. For those that haven’t thought about it, now is the time to look at saving money, shortening the length of your loan, and owning your home sooner than ever.
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With more and more consumers capitalizing on the current low interest rates, I have noticed that all types of homeowners are now interested in finding out what a refinance can do for them. This brings a lot of different people around the refinance window just to ask a few questions, and I think that’s great! An essential part of finding the best refinancing option is by looking for it.
One of the issues that these homeowners want to know more about is how much will a refinance cost. They ask this either because they want to try and decide if refinancing will save them money in the long run, or because they don’t have a lot of cash on hand to cover thousands of dollars in closing costs. If you don’t have a lot of capital or aren’t planning on staying in your home for at least 5 years, you might want to think about looking at a no-cost mortgage.
What is a No-Cost Mortgage?
Our resident Mortgage Professor, Jack Guttentag explains that a No-Cost Mortgage “…is a mortgage on which the lender pays the borrower’s settlement costs, with certain exceptions. The lender won’t pay your tax escrows, homeowner’s insurance, or transaction taxes if there are any. You will also be stuck with paying interest on two loans for a few over-lapping days. All other costs, including the mortgage broker’s fee if there is one, are paid by the lender.”
Having the lender pay many of the closing costs doesn’t come without a price, however. The closing costs are added back into the loan increasing its size, and the interest rate is also increased. Of course, if your overall monthly payments decrease and you did not have the cash to cover the costs anyways, this type of refinance might be the best option for you. Also, for those that plan on selling their home soon, this type of refinance can mean lower monthly payments now without having to pay cash up front. Those who plan on living in their home for many years will want to look at more conventional refinancing options.
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No one can deny the fact that refinancing is heating up across the country. This means more consumers are going to be making important mortgage decisions in the coming weeks. When you do, there are always going to be a lot of things to consider. One of the first choices you will make is whether you are looking for a fixed rate or adjustable rate mortgage. In the past, fixed rate mortgages were considered safe and more economical for those who are looking at staying a long time in their home. Today however, adjustable rate mortgages could be the key to saving thousands of dollars sooner than you might think.
What’s the Difference between Fixed and Adjustable Rate Mortgages?
In a nutshell, it is the way the interest rate is calculated. A fixed rate mortgage (FRM) has a consistent interest rate that is agreed upon prior to the closing of the loan. An adjustable rate mortgage (ARM), on the other hand, has a floating interest rate. This means that your monthly payments will vary somewhat as the interest rate moves around with the market. The length of the terms is also different. FRMs tend to be spread over many years (usually 15 to 30), whereas ARMs typically have a cycle of 7 years or less.
What Makes ARMs Better Today?
Because of the risk involved with having an interest rate that moves with the market, the initial interest rates are much smaller than rates for FRMs from a given lender at the same time. Since no one is expecting interest rates to move much up or down in the coming months, choosing a loan that takes this into account is a good idea.
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Just when you thought that mortgage rates were beginning to show signs of going up, they drop again. Though the decrease overall last week was not very significant, it shows that rates are likely to remain at current levels (within 10 points or so) for a while. The question I am hearing from many consumers lately is, “Have we hit the bottom?” The truth is that only time will tell.
Right now we are looking at rates that have held relatively stable for the last 3 weeks. This means that those who began refinances about a month ago are probably getting ready to close. If you also locked your interest rate, you would still be happy with your decision. Even those who did not have found that today’s rates are what they had hoped for. Whether this stabilization will stick around, or if this is truly the bottom of interest rates this summer, are questions that only the coming weeks will answer. I do know that there are a lot of happy homeowners who decided to get involved and refinance sooner rather than later.
Is there a fast track to refinancing?
If you want to save the most money, you have to take the time to look at all your options. You also have to understand where you stand in the mortgage market. Though there isn’t a “fast track” to refinancing, checking your Mortgage Grade first can really help to set you on the right path.
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One of the most frustrating areas of dealing with a refinance is often the appraisal. It can ruin your refinancing attempts and in the past, lenders have taken advantage of improper appraisals to justify offering more expensive loans. Luckily, with the Dodd–Frank Wall Street Reform and Consumer Protection Act, financial reform is here.
Regulating something like appraisals isn’t easy. Every city is different and so is every appraiser. There are several things that these new laws will do for homeowners and homebuyers alike:
- Trash the old Code of Conduct (HVCC) for appraisers that often caused more problems than it solved.
- Standardize those who manage appraisers through new regulatory procedures.
- Help to create a stronger base of independent appraisers.
These changes should help to make sure that your home is valued properly when you go to refinance. The largest lenders (Fannie, Freddie, and the FHA) have already incorporated these practices into their appraisal systems. This is pretty impressive for a law that has only been signed for five weeks.
The biggest change that consumers will notice is that the appraiser’s fee and the fee of the management company will be put on separate lines of your closing costs list. These new regulations should really help consumers to know what they are getting when it comes to the appraisal. Of course, when it comes time for the appraiser to look at your home, be sure to ask how long they have been doing the job and how many homes they’ve appraised in the area. Those are vital pieces of information when it comes to getting an accurate appraisal.
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Every so often I get asked the same question “Is there a difference between refinancing and simply making extra mortgage payments?” The reason that this question confuses people is that it doesn’t always have the same answer. Knowing whether prepayment or refinancing is best for you will depend a lot on your personal mortgage situation. If you have a specific question about your mortgage, I recommend you ask our resident Mortgage Professor, Jack Guttentag.
There are several aspects of your mortgage that you will need to consider to find out if a refinance or prepayment is the right option:
- Points Paid: If you paid points originally on your mortgage, then prepayment will raise your effective interest rate.
- Change the Term: Refinancing can significantly lower your term length. If this is your goal the result could be a much increased savings over prepayment. Of course, your monthly payments will also increase when you shorten your term.
- Count on Closing: Unlike prepayment, a refinance comes with a variety of closing costs. These should also be added with a refinance to determine which is best for you. Typically, the longer you expect to stay in your home, the more sense it makes to refinance.
With extremely low interest rates and a variety of options for homeowners with a high LTV (loan-to value) ratio, finding a refinance is not as hard as you might think. Unlike prepayment however, it will take extra time to organize as well as a lot more paperwork. Making the right choice will depend on how much you are looking to save in the long run.
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The Obama Administration released its report on one of its mortgage relief programs, HAMP (Home Affordable Modification Program), at the end of last week. Over the week I had a chance to look at the findings. The report revealed several things I thought were mentionable:
- 48% of the 1.3 billion homeowners who began the program back in March 2009 have dropped out.
- To date, 32% of those who started the program have received modifications and are making their mortgage payments regularly.
- The number of dropouts from the program has increased 40% from June to July.
- Over 35,000 homeowners received long-term loan modifications in July.
When you look at the program as a whole, I think that it shows an accurate picture of the housing market right now. Some are finding their way, while many are falling to the wayside. The problem is that as foreclosures increase, home values will not improve and many will still find it hard to refinance.
So what do I do?
If you are seeking a refinance but having trouble applying successfully, you need to start by knowing where you’re at. The easiest way I know of to find out is by checking your Mortgage Grade. This way you will not only be able to tell when you are ready for a refinance, you will also be able to get advice on how to improve the loan you qualify for.
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An important part of reading the refinance market is looking at home loan applications. You can see what types of loans consumers are applying for as well as how much they are paying. As interest rates rose last week, you might think that applications decreased. This, however, was not the case.
Here’s what the report showed:
- The number of refinance applications rose over 15% to the highest levels since mid May 2009.
- The number of purchase applications for new home loans dropped over 3%.
- While the average price for both 15 and 30 year fixed rate mortgages went up, those who chose 1 year ARMs (Adjustable Rate Mortgages) received lower rates last week.
Obviously the big story is the increase in refinance applications. As interest rates floated higher, more and more consumers began the process of refinancing. I think this is something that some may have waited too long to begin.
Refinancing today can take longer than ever because there are more checks required by lenders. They will need more man power to complete required fraud checks as well as double check several of your financial figures at the beginning and end of the refinance process. Even if you have already started the process of refinancing, keeping track of your personal mortgage situation with a tool like a Mortgage Grade is a good idea.
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After a month of continually dropping interest rates, improvement was seen in the past week. How much improvement? Not a lot. After a large dip in rates the week before, the upward swing makes little difference for many consumers who are already engaged in the processes of getting a home loan. For those who have not yet decided to enter into the refinancing market, you may think that time is running out. The longer you wait the more likely you are to prove yourself right.
When interest rates are low, many believe that it is the consumer who has the upper hand. In today’s mortgage market, this thinking can get you into trouble. The truth is that lending standards, closing fees, and even your Good Faith Estimate have all become more complex. Lenders are going to be checking and rechecking the numbers to make sure they add up to a good investment.
So, what does this mean for Homeowners?
The result for the consumer is a longer “line-up” at the refinance window. It also means providing more information or at least having your information more thoroughly checked before your loan is approved. This makes it very important to understand everything about your personal mortgage situation if you want to get the most out of a refinance today.
What about the Future?
Once interest rates actually bottom out (I’m not sure this has happened), the rise will take some time. It is fairly unlikely that a dramatic upward swing will be seen this year. With little movement forecast for rates in the coming months, refinancing is best done at your pace, not the pace of the market.
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When it comes to home ownership, every state is a bit different. Not only the laws can vary, but so can the prices of fees associated with buying a home. Many of these fees are all bundled together into what are known as closing costs. If you’ve taken out a home loan, you’ve paid these costs. Like housing prices, these fees are also subject to a changing market. Let’s have a look at some of the facts about closing costs around the country right now:
- Closing Costs Have Increased: Overall closing costs in America have gone up. On average, the amount has gone up to over $1,000 to close on a $200,000 home. This is caused by an increase in the work that lenders must do to close a loan (more credit checks and verifications) as well as increasing appraisal and title insurance fees.
- New York and Texas on Top: Among the most expensive states to close in are New York and Texas. This year, homes in New York were found to have average closing costs of over $5,000. In today’s market, New York is more expensive, but that could change. Other notably high closing cost states include California, Utah, and Alaska.
- Arkansas on the Bottom: Among the lowest states to close on a home loan is Arkansas, with the average cost of closing sitting at just over $3,000. Other cheap states to close in are North Carolina, Iowa, and Montana.
Closing costs are something that everyone who gets involved in the mortgage world is going to have to deal with. Understanding these costs today is important if you want to make the right decisions about your mortgage.
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