Catch 22: It's a Great Time to Refinance... If You're Not Underwater
Interest rates are enticingly low, and they have been for months. Thirty-year, fixed rate mortgages are the holy grail for homeowners seeking stability and security, and they haven't been so affordable in decades. But the primary reason for the historically-low rates is the equally unprecedented funk in the housing market. Real estate values have declined (precipitously, in some regions) and the market may not look like it's in for a dramatic rebound anytime soon. What does all this mean if you're looking to refinance your mortgage?
In general, lenders require that you hold 20% equity in your home in order to qualify for mortgage refinancing. In other words, if you owe $80,000 on your mortgage, your home must be worth $100,000 in order for you to qualify. If that's your situation, it's definitely time to look at refinancing-there might never be a better time.
But what if you're underwater, meaning that you owe more on your mortgage than your home's current worth? That makes matters a bit more complicated...
The Waiting Game
Option number one is to wait out the housing market funk. Stay in your home, watch the market and sit tight for the inevitable, though long-awaited, rebound. The hope is that interest rates will still be attractive-though probably not historically so-when you're ready to refinance. Use the knowledge and experience gained during the recent boom and bust to review your options carefully and make wise choices.
An Assist from Uncle Sam
The federal government's Making Home Affordable initiative has generated plenty of coverage about its loan modification program for homeowners in danger of default and foreclosure. A less talked-about feature of the initiative is the Home Affordable Refinance Program (HARP) which provides assistance to homeowners who may be underwater but whose mortgages are in good standing.
Under HARP, you could qualify for refinancing if the amount you currently owe is up to 125% of your home's current market value-in other words, if you owe $125,000 on your first lien mortgage you could qualify for refinancing even if your home's current value is as low as $100,000. The idea is to provide opportunities to creditworthy homeowners who have shown a commitment to paying their mortgages. Additional criteria for HARP qualification include, but are not limited to, the following:
- Your current mortgage must be backed by Fannie Mae or Freddie Mac
- Your current mortgage must be in good standing, and you must have good credit and documented income
- Second mortgages cannot be included but can be subordinated and kept in place
For more information, go to www.makinghomeaffordable.gov.
So What's Your Best Bet?
In a word: persistence. Take a look at all your options. Research alternatives, gather information and seek the advice of professionals. Continue to shop rates and compare terms-and get ready to act when the time is right.