Saturday, January 24, 2009

Hidden Costs in Refinancing

One of our earlier posts discussed the new rules for refinancing. Lenders are getting stricter on the credit scores, substantial equity is required and closing costs can be pretty expensive.

Lenders have realized once again that they should require more than a pulse and a property to lend someone hundreds of thousands of dollars. They need a good borrower who has a stake in the property and that will able to make the payments.

Today in the New York Times there is an article titled Costs and Tighter Rules Thwart Refinancing. It discusses even more new rules to the refinancing requirements. Lets take a look -

While rates are falling, borrowers face higher costs every step of the way, from rising fees for mortgage insurance to added costs that drive up the mortgage rate. At the same time, lenders have become more cautious about whom they will lend to, as more people lose their jobs, watch their incomes decline and fall behind on their bills.

Alternatively, consumers could just buy the mortgage insurance. But getting the insurance is no longer simple. Private mortgage insurers, which incurred large losses when the housing market collapsed, have become much more selective. They also are charging more for their service. Even if a borrower does qualify for insurance, the increased costs often wipe out any savings from refinancing, mortgage brokers said.

All borrowers pay a fee known as an “adverse market delivery charge” of 0.25 to 0.50 percent of the loan amount. Fannie, for example, also imposes a fee of 0.75 percent on owners of a condominium or cooperative apartment with less than 25 percent equity. Borrowers with a home equity loan or line of credit may pay another Fannie charge of up to 0.50 percent, depending on a variety of factors.

And borrowers who want to take cash out of their homes when they refinance — if they have enough equity — are charged a fee ranging from 0.25 percent to 3 percent of the loan amount, depending on their credit score and amount of home equity.

The cost of refinancing also varies greatly from lender to lender. “Pricing on mortgages today is erratic,
” Mr. Stoffer [president of Stoffer Mortgage in North Canton, Ohio] said. “This is due to banks pricing aggressively and then pulling back dramatically as they get more volume than they can handle.”

Additional new rules include having an income and proving it! Showing that you make what you say you make has come back. Full documentation is back again. The lenders expect you to bring in recent, accurate paperwork - missing paperwork can mean no refinancing.

Likewise are the increased rules for having open home equity lines. The new rules require that equity be paid back before or adding additional points onto the new rate. The additional points might negate any real savings. The points can also be added on to those who want cash out. Once highly pushed now it is questioned and penalized.

Also requiring mortgage insurance to those that own less than 20% of the current value of their property. And those in the Jumbo loan category may even be faced with more stringent rules.

So lets summarize all of the new refinancing rules -
  1. 740 is the new 720 - FICO cut-off wise.
  2. You need at least 20% equity for the current value of your property. (Not the 2005 purchase price.)
  3. Factor in the closing costs in the actual refinance calculator to determine your break-even time. (A lower rate with high closing costs may not really save much money.) Will you still be on the property when you actually start saving money?
  4. Additional points for having a HELOC, HEL or taking cash-out. These additional points are ranging from 0.25 to 3. A huge range that may negate any real savings regarding refinancing.
  5. Mortgage insurance required even on refinanced properties whose owners have less than 20% equity in the current value of their homes.
  6. Proving one's income through full documentation is required again. The days of stated income loans AKA liar loans are long gone.

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