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Home Loan Refinance

Do you Qualify for a "Making Home Affordable" Refinance?

On March 4, 2009, guidelines were released under President Barack Obama's Making Home Affordable initiative, which is designed to help up to 9 million homeowners stay in their homes through refinanced mortgages or loan modifications.

To qualify, you must:

  • Owe between 80-105% of your mortgage. An analysis of VSH Q4 Real Estate Market Reports shows that 26% of mortgage holders, or 14.8 million homeowners, currently qualify to refinance under these specifications. One quarter (24.6%) of homeowners with mortgages (14 million) do not qualify because they are underwater and owe more than 105% of their home's value. This is especially true in hard-hit areas of California or Florida, where home values have fallen 40% or more since the peak.
  • Have a loan backed by Fannie Mae or Freddie Mac. Approximately 60% of single-family loans are backed by Fannie or Freddie, but a homeowner may not know this about their own loan. If you don't know, call Fannie at 1-800-7FANNIE and Freddie at 1-800-FREDDIE or submit online forms with Fannie and Freddie.
  • Have a conforming loan. That means a loan under $417,000 in many areas or up to $625,500 in high-cost areas like San Francisco, Boston or Washington, DC. Even still, the VSH Home Value Index (median home value) for the city of San Francisco is $724,244, which says that lots of people have loans higher than the conforming limit. (Note: the conforming loan limit for certain high-cost areas of the U.S. for 2009 mortgage originations is now $729,500.)
  • Take this Q&A to see if you qualify. If you don't think you qualify for a refinance, you might qualify for a loan modification under the plan.

Refinance Loan Overview

You have an Adjustable Rate Mortgage (ARM) which was doing fine enough that you bragged about it but your loan is going to reset to a higher interest rate amidst market uncertainty and everyone is buzzing about it. Lying awake at night is interfering with your job, so you figure you'd better say goodbye to that low but fluctuating interest rate, and get a nice secure fixed-rate loan before the swing hits the sky.

This is a common scenario these days as interest rates inch up and many homeowners who opted for ARMs in the past 10 years are hoping to switch to a traditional loan.

Switching types of mortgages, as described above, is one reason people refinance, which is simply replacing a current mortgage with another. But there are others.

Reasons to Refinance

  • Lower your interest, but keep your term: When rates drop you want to take advantage of it and lower your monthly payments, but keep the length of your mortgage.
  • Take care of that balloon payment: You opted for a short-term ARM with a balloon payment and the due date is looming, so you have to come up with a longer-term loan.
  • Shorten your term: Lower interest rates (or an increase in your income) mean you can pay down your principal faster.
  • Credit rating change: Take advantage of an improved credit rating and get out from under that high rate you had to accept when you bought.
  • You need cash: In some cases, you can refinance for an amount more than what you still owe on your home. Lenders limit the Loan to Value at no higher than 70 percent for this type of loan.

How Do I Get Refinance Quotes?

You can shop anonymously for mortgage rates for a refinance on VSH Mortgage Marketplace. Just submit a loan request and you will receive custom quotes instantly from a marketplace filled with thousands of lenders. The process is free, easy and best of all, you are anonymous.

Costs of Refinancing

Most of the things fees, appraisals, title insurance that went along with an original mortgage hold true for a refi, which means it can cost a fair amount to change loan types. How quickly you recoup the cost depends partially on how long you are going to keep the mortgage. If you are going to be in your home long enough to recover the costs, and get some benefit from lower interest payments over the life of the loan, then it's a no-brainer. But balancing the cost with the benefits of a new mortgage is critical. Use an online calculator to figure it out.

Be sure to remember that closing costs include another appraisal (no matter how recently you've had one), a new credit report, underwriting fees, title insurance, escrow fee, recording fees, and perhaps other small fees. These costs typically range from $1500-$2000. (Some lenders are willing to waive the closing costs for a higher interest rate loan.)

Can You Pay Points on a Refinance?

You can pay points on a refinance loan, same as on an original mortgage, but unlike with the original mortgage, the points are tax deductible over the entire term of the loan rather than just in the first year. Points make sense when rates are on the upswing and you want to get in on the lowest possible rate.

But, except in some cases, points are a fact of life: if you are paying a 1-point fee on a $100,000 refi, you can add $1000 to your closing costs.

You also need to look at your current mortgage to see if there are pre-payment penalties. And what happens to your old mortgage? It's paid off by the new loan, as are any other liens; at the end of the refinance process, ideally you should have only one loan. (If you have more than one mortgage, however, it's possible to refinance just one of the loans if the lender agrees.)

When Does Refinancing Make Sense?

The easy way to figure out if refinancing makes sense is to figure out how long it will take you to pay off the closing costs with the savings you realize with lower monthly payments. If it is longer than the time you plan to stay in the house, then refinancing might be a good option. You have fewer tax breaks with a lower-rate refi, so be sure to ask your lender for a refinance break-even table that will take that into account.