Wednesday, January 21, 2009

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?
Post more in comments if you know some we missed. While compared to the bubble these are very strict new rules. However overall they are really just the old rules that worked being re-applied. Rather than something new and innovative they are turning back to what worked.

Unfortunately these new rules leave many people out of the refinance frenzy. An article from the Orlando Sentinel titled Refinance? First, see whether you will save outlines the new refinancing issues. Lets take a look -

When mortgage rates fell below 5 percent last month, broker Jeff Perdue's phone lines lighted up as dozens of people tried to join the latest refinance boom. When the ringing stopped, only five were approved.

The rest had good credit, good income and "decent equity" in their homes, but that wasn't enough, said Perdue, owner of Orlando Home Mortgage.

"The value of their homes killed the deal," he said. "I had to call them and tell them, 'I'm sorry. If your house had been worth what it was when you bought it, this would have been a piece of cake. Now the numbers don't make sense for you.' "

There is no surefire formula to determine whether you should refinance. First of all, focus on your potential savings, not whether your new rate will be a point or two lower than your current one.

If the refinanced loan amount is more than 80 percent of the home's value, borrowers must pay a mortgage-insurance premium, which can dramatically reduce any savings. If it goes over 90 percent, you would have to bring money to the table, which could make the deal cost-prohibitive.

"Only good borrowers need apply," said Andrew Orr, a financial planner with OrrGroup Financial. "We are back to the 1950s, so to speak, when people wanted a home for shelter, not for an investment. So, it's actually a good situation now, even though it makes it difficult for people to get a mortgage."

Only the good borrowers need apply. First determine if you are good borrower by today's standards, not bubble requirements. Then make sure you are actually saving. We have seen some closings in above $10,000. How would it take to pay off those costs. These closing costs should be factored in as much as the rate.

Notice that more than a pulse and a property are now required for mortgages. The bubble is gone. Times have changed.


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