Looking to refinancing

The growing reality in today’s economic climate is that home values have plummeted. People who had paid religiously into their mortgages for years were surprised when the economy ate away at the equity they thought they had amassed. That is the stickler when it comes to refinancing. People have such low equity that it hardly qualifies them for a refinance. Add to the equity issue the fact that lenders are much stricter now post-recession and banks are adding higher fees, and it makes for a sector of homeowners who have few options.

The new states of interest rates and home value

The survey done by Credit Suisse showed that about 39% of homeowners in the 30-year fixed-rate segment currently have interest rates of over 7%. A good number of those people could bring their interest rates down two full percentage points if they were able to refinance at current rates. Despite the possibility, however, the number of refinance applications in January of this year was lower than it was this time last year.

Another chronic problem the recession created was the increase of underwater mortgages. This is a condition where homeowners owe more on their houses than what the property is worth. Recent surveys show that almost 25% of all homeowners are currently underwater. Of course that also makes it impossible for them to refinance and find relief. The reality of the banking world is that banks want collateral to back up the loans they are making and with drastically diminishing home values, they aren’t willing to take on the risk. A homeowner, who has no equity on the books, is left with few options when it comes to maneuvering their debt and finding fast cash.

What is being done to help

The overriding issue when it comes to refinancing is how things can change to make more homeowners qualify. Most experts agree that due to lenders creating stricter rules, they are undermining the government’s efforts to allow homeowners to use the lowered interest rate advantage. It defeats the purpose of sustained lows in interest. Fannie Mae and Freddie Mac are also adding their own fees in an effort to raise revenue and mitigate losses. It’s easy to see how mitigating losses and maintaining low interest rates are counteracting one another. Fannie Mae and Freddie Mac are seeking a balance between taking on the risk of low-credit scoring homeowners and giving more people access to credit and refinancing options.

In the future expect more homeowners to be able to refinance and find fast cash like they did in the past. There is a caution, however, that those with drastically low credit scores most likely will not be able to refinance, regardless of what changes lenders make. Though the government and lenders are working together to create more customer-friendly climates for those with less-than-perfect credit, it will take much longer for low-credit customers to find any relief.

Need fast cash? Apply HERE!

Although advertisers talk about refinancing, it isn’t always a sure-fire way to find fast cash. Anyone who is thinking of refinancing needs to think about the pros and cons to the move. People who are chronic refinancers and jump on the lowest interest rates don’t always benefit in the long run. They have a long list of fees and closing costs that can add up and eat away at savings.

The real reason for a refinance

The first thing a homeowner should figure out is what their goal is for the potential refinance. Consumers need to be warned that refinancing doesn’t pay off debt, it just reorganizes it. Sure it is normally at a lower interest rate, but there are other variables that change to accommodate that change. Those variables may eat away at overall savings. Normally, reducing monthly payments is the most prevalent reason why consumers try to refinance, and debt consolidation is the second. According to Holden Lewis, economist for Bankrate.com, “Consumers need to talk to a professional to do the numbers and find out if the goal really is worth it. Getting rid of debt is a great thing, but if the rate cuts down on income drastically, it may not be the best option.”

When to refinance

After honing on the reason a consumer wants to refinance, the next thing to decide on is when. According to Bankrate’s 2008 Closing Cost Survey, the national average for closing costs on a $200,000 loan is $3,118. That is in addition to taxes, insurance and prepaid items like interest and association dues. Consumers need to remember that getting a lower interest rate extends the length of the loan and, in turn, can cost more in interest. For example, replacing a mortgage that has 20 years remaining with a 30-year mortgage results in a higher interest expense over the entire lifespan of the loan and may mean a much larger interest payment overall. There are two calculations to follow when trying to find fast cash from refinancing:

1. One calculation where the new loan has the same term as the old loan
2. One calculation where the new loan is the length of the planned refinance

From there, consumers can compare the interest savings to see if refinancing reaches their financial goals.

When to not refinance

There are specific instances when a refinance will not help. For example, if a homeowner doesn’t plan on staying in a home for very long, it’s most likely a better idea to stay in the current mortgage. Considering the number of months of savings they need to recoup closing costs, it may take longer than they plan on living in the property. Also, people who are underwater with their mortgages most likely should stay with their current mortgage. It’s highly unlikely a homeowner in an underwater position will find a lender.

Another reason to not refinance is hefty prepayment penalties. The penalty payment creates another expense for homeowners to factor into the overall cost of the refinance. Homeowners would be better served by waiting beyond the initial two or three years when the prepayment penalty is active. Most likely consumers will have a better chance of refinancing further down the road.

The benefits of refinancing

Despite the tricky calculations regarding refinancing, it still can benefit many homeowners if done in the right way and at the right time. Refinancing can help consumers find fast cash if they are smart about making the decision. A good financial planner or online banking tool can help steer consumers in the right direction when facing the prospect of refinancing or not.

Need fast cash? Apply HERE!