This is an archived article that was published on sltrib.com in 2010, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
Mortgage rates are lower than they have ever been. So why aren't more people refinancing — and could the time be right for you?
Even with a slight increase last week, the average rate for a 30-year mortgage was 4.35 percent, while 15-year loans remained unchanged at 3.83 percent, mortgage buyer Freddie Mac said.
For those who recall taking out a mortgage with a double-digit rate in the 1980s, one in the 6 percent range would be considered great. In the 5 percent range? Wonderful. In the 3 percent to 4 percent range? Almost too good to believe.
"I never thought mortgage rates would go below 5 percent," said Greg McBride, senior analyst at Bankrate.com, a financial-services website.
Surprisingly, though, even with rates so low, many Salt Lake-area lenders say refinancing activity has been lighter than they expected, and nationally, refinancing levels declined last week for the first time in nearly two months, according to data from the Mortgage Bankers Association.
A bad economy, combined with tighter lending standards, declining home values, layoffs and pay cuts — and even "refinancing fatigue" — have shrunk the number of refinancing candidates, McBride said.
"Rates have been below 5 1/4 percent for a year, and many [borrowers] with the desire and means to refinance already have."
A number who have refinanced multiple times in recent years are hesitant to pay closing costs and go through the whole process again. Others, he said, no longer qualify because of increased scrutiny of borrowers or because they owe more on their mortgages than the homes are worth. Still others are passing because they know they won't be able to pull any equity out of their homes — a popular move several years ago that lenders these days aren't allowing as often.
"The pool [of potential borrowers] has clearly dwindled," McBride said.
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How low can they go? • Some homeowners are waiting to see if rates fall evenfurther.
But will they?
Rates could go even lower, McBride said, but by how much is anyone's guess because we're in uncharted economic territory.
In the most simplistic terms, the worse the economic news gets, the lower mortgage rates go. That's because investors, bearish on the economy and Wall Street, have been shifting money into safer Treasury bonds, pushing the bond prices higher and yields lower. Mortgage rates tend to track bond yields.
The U.S. economy isn't expected to recover fully anytime soon, and more bad news could come, which could push rates down further.
Some experts said even another half-percent to 1 percent drop in mortgage rates may not spur a refinancing boom.
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Refinancing grows difficult • A big reason for a dip in refinancing is the tighter lending standards in place for home loans. Three or four years ago, even borrowers with limited means, low credit scores and little or no cash down payment could qualify. Nothing down? No problem! Loans were even made to people who simply "stated" their incomes, without providing much in the way of supporting documentation.
The result was a subprime credit meltdown involving risky borrowers that accelerated the economic downturn.
These days, when it comes to refinancing, lenders are paying closer attention to credit-worthiness, proper documentation of income, how much cash borrowers have and how much equity they have in their properties.
"If your credit has deteriorated, if you don't have sufficient income, can't prove your income, or don't have equity in your home, each of those could be a barrier to refinancing," McBride said.
Another major issue is "negative equity," or owing more on your mortgage than your home is worth. Studies have indicated that the less equity a borrower has in a home, the more likely they are to default on their mortgage. So lenders are hesitant to approve new loans for those who don't have at least some equity.
But in the Salt Lake City area, nearly one-fifth of residential properties with a mortgage were estimated to be in a negative-equity situation during the second quarter, according to California-based business-information firm CoreLogic, which tracks real estate data. Another 6.3 percent were approaching that point. That means about one-quarter of all homeowners owe more than their homes are worth or are heading in that direction as home prices in many areas along the Wasatch Front continue their decline.
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Help is available • There are little-known programs offered by Fannie Mae and Freddie Mac that can help homeowners in negative-equity situations refinance into lower-rate loans when they otherwise wouldn't be able to, said Julia Borst, president of the Utah Mortgage Lenders Association.
Not all borrowers qualify for the programs, though. For example, your loan must have been purchased by Fannie Mae or Freddie Mac after you took it out.
Fannie Mae and Freddie Mac don't originate loans. Instead, they are government-sponsored enterprises that purchase loans on the so-called secondary market, package them and sell them to investors. Though most loans are purchased by either Fannie or Freddie, borrowers must meet other criteria.
For example, loans must have been acquired by Fannie Mae by March 2009 and Freddie Mac before May 2009. That means if you purchased a home in late 2009 or this year, you're not going to qualify for the relief programs.
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Declining values an issue • For many lenders trying to help clients refinance, the downward spiral in home prices is problem No. 1.
"Appraisals are just coming in so low," Borst said, adding that she has one client who put down 20 percent on a condominium purchased for $279,000 two years ago. The owner recently wanted to refinance but was shocked when the appraisal came in last week for $198,000.
Sandwiched between two foreclosures, the client's home had fallen 30 percent in value in two years, effectively wiping out the down payment — and then some.
Those in the best position to refinance bought their homes prior to the market's peak in 2007 and have maintained their credit and incomes throughout the downturn.
Chad Lingmann and his wife, Rachel, purchased their home in 2005. They had enough equity to qualify recently for refinancing, swapping their 30-year home loan at 5.875 percent — a stellar rate just two years ago — for a 20-year loan at a rate of only 4.375 percent. The best part? The couple's monthly payment stayed about the same.
"We'd heard about how low rates had fallen, and we're pretty happy we looked into it," Chad Lingmann said.
Their mortgage lender representative, Brady Johnson, of RANLife Home Loans in Salt Lake City, has been in the mortgage business for more than six years, and like many professionals, he is shocked by how far rates have fallen.
As are other lenders, Johnson is marketing so-called no-fee refinancing plans in hopes of attracting borrowers with the means to refinance but hesitant to do so because they have refinanced multiple times in recent years, paying closing costs each time.
With no-fee refinancing, a borrower takes a slightly higher rate in exchange for paying no closing costs. (That differs from refinancing and having your closing costs rolled into your loan balance.) On a $180,000 loan, if you were able to get a 30-year rate of 4.25 percent by paying about $3,800 in closing costs, you might be able to avoid those costs by paying a slightly higher rate, such as 4.5 percent.
No-cost refinancings are ideal for those who don't know how long they are going to be in their homes and whether they will move before they recoup the amount spent on closing costs.
As a general rule, if you think you're going to be in your home at least five years, you might benefit from paying closing costs — either in cash or by rolling them into the loan balance — and getting the lowest rate possible.
The Lingmanns plan to be in their home for a while and are excited at the prospect of being mortgage-free years earlier.
"We're saving $180,000 over the life of the loan," Rachel Lingmann said.
Should you refinance?
Here are some reasons it may be a good idea:
You want to trade in an adjustable-rate loan for one with a fixed rate.
You want to pay off your home more quickly with a 10-year or 15-year mortgage.
You want to combine a first mortgage and a second mortgage into a low fixed-rate loan.
You have a rate at least 1 percentage point higher than today's rates and you plan to be in your home for a long time.
You can lower your rate with a no-fee refinance. —
Why you may not qualify for refinancing if:
— Your home has fallen too far in value.
— Your credit and/or income is too low.
— You owe more on your mortgage than your home is worth. —
How refinancing is different in today's market
Length • It may take weeks or months longer to complete.
Interviews • Even those with high credit scores are being grilled by underwriters.
Documents • You may be asked for more documentation than you have been asked for in the past.
Previous loans • You may have difficulty refinancing if you have home-equity loans and lines of credit.
Home equity • You may not be allowed to take out any of your home's equity in cash. —
What you could save
New mortgage • On a 30-year, $250,000 mortgage, the monthly principal and interest payment at a rate of 5.5 percent would be about $1,420.
30-year refinance • Refinance into a 30-year loan with a rate of only 4 percent and you'll pay $226 less —or $1,194 per month.
15-year refinance • Refinance into a 15-year loan at 3.75 percent and your payment would go up nearly $400, to $1,818 per month, but you could pay off your loan in half the time and save on financing costs.