Refinance Before You Can’t
This may sound like some lame sales pitch a loan officer would use to force a consumer into making a decision, but unfortunately this statement is currently very true, particularly in Florida. There are currently two forces at work that are disqualifying more and more homeowners each day from being able to refinance at the best rates. If you are holding our for a certain rate you may end up unable to take advantage if you wait too long.
There are two major problems and once they intersect on your home, you will no longer be able to refinance. This would mean you are stuck in whatever loan you have until the credit and real estate markets correct themselves. This could be years, so I would recommend exploring your refinance options now while you still have some.
Problem 1: Refinance Guideline Changes are Raising Rates for Many Borrowers
We have seen sweeping changes to mortgage guidelines and with each set of guidelines a new group of homeowners is either unable to refinance or they cost for that group to refinance increases considerably. Fannie Mae recently raised the interest rate for any borrower with less than a 720 score. A few months ago only scores below 680 received higher rates, and a year ago only scores below 620. A 720 is actually a very good credit score, so you can see where the trend is going. At the same time the AMOUNT rates have to be raised on the lower credit scores was increased significantly as well. So even if mortgage rates as a whole get better, the interest rates available to 50% of homeowners with a credit score lower than 720 will be worse!
If you think you are safe because you have a credit score higher than 720, keep in mind no one thought scores above 680 would ever be penalized like this. There is no way to know what credit scores will be included in the next round of changes. The current set of changes do not become effective for another month or so, so again - Refinance Before You Can’t!
Problem 2: Increased Equity Requirements for Refinancing
In addition to worsening rates for those with scores under 720, the mortgage market has also increased the amount of Equity required for the State of Florida (and other parts of the country) by 5%. For example you could previously refinance your home as long as you would have 5% equity remaining after the new loan, now you must have 10% equity remaining. If you wanted to take cash out of your equity to consolidate bills you previously had to leave 10% of equity untouched, now you have to leave 15%. Worst of all if you do not have this much equity in your home, you will be unable to refinance.
Again, there is no way to know what the next round of changes will bring. They may increase required equity by another 5% meaning you would need a bare minimum of 15% equity just to refinance for a better rate. The idea here is to refinance before further changes take place, or realize you may be unable to do so for years to come.
Problem 3: Declining Values in Florida
In addition to the mortgage markets increasing the amount of equity needed for refinance, home values in Florida are dropping and destroying your remaining equity. I have hears stories recently of borrowers who were “holding out” for the best interest rate and while they were holding out their home lost 3% - 6% equity and made them ineligible to refinance! Once such story is of a borrower who will now be stuck in their existing ARM Loan at a very high rate until the market rebounds.
I outlined above some of the equity requirements and in many parts of Florida that equity is going away quickly. If you think you may need to refinance any time in the next 2 - 3 years I would suggest you explore your options NOW. The terms available to you today are better than the terms will be in a few months, or you may find that in a few months you are unable to refinance completely.
Robert Palmer
R P Funding
Jacksonville Beach, Florida
904-270-2812