- - Thursday, March 15, 2012

Superlow mortgage interest rates have plenty of homeowners scrambling to contact lenders about refinancing, but not every homeowner can or should refinance. Mortgage experts say homeowners should ask themselves some questions and consider their goals before applying for a new mortgage.

“Homeowners should think about how long they intend to keep their property,” said Johnathan Thomas, vice president of Virginia Commerce Bank in Chantilly.

“If it will take you six or seven years to break even, it may not be worth the cost of refinancing,” he said. “Don’t get caught up in the interest-rate hype; look at when you’re going to get your money back.”

Brent Mendelson, a senior loan officer with Monarch Mortgage in Rockville, suggested that homeowners discuss whether they want to reduce their monthly payments or pay off their loan faster.

Regardless of their goals, not every homeowner will qualify for a new loan. Homeowners who do qualify may not be approved for the lowest advertised interest rates, although they may still come out ahead financially.

Approval for a refinance is based on two main factors: the borrower and the property.

“Credit is the biggest issue we face with most of our mortgage applicants,” Mr. Mendelson said. “If your credit score isn’t good enough, you can be locked out of refinancing completely.”

While property values in the Washington-area real estate market have been more stable than in other parts of the country, many homeowners have less equity in their homes than they think. In general, most lenders will allow homeowners to refinance up to 95 percent of their home’s appraised value, said Juli Anne Callis, president and CEO of the National Institutes of Health Federal Credit Union in Rockville (NIHFCU).

Homeowners can work on their credit issues, which may take time, depending on the problem, but the value of their home is determined by an appraisal. But even homeowners who are underwater on their mortgage - owing more than their home is worth - may have an option to refinance.

“While the maximum amount a conventional loan allows for a refinance is 95 percent, there are government programs in place that allow some homeowners to refinance more than their current home value,” Mr. Mendelson said.

Homeowners should get in touch with their lender to learn whether they can qualify for one of the government programs geared to underwater borrowers. Mr. Mendelson said homeowners also can choose a “rate-and-term” refinance with an FHA-insured loan that allows a loan-to-value as high as 97.75 percent.

A rate-and-term refinance simply means the borrower is refinancing a mortgage into a new loan at a new interest rate and a new loan term and not taking cash out from the home’s equity.

“Borrowers with less than 20 percent equity who choose a conventional loan will either have to pay private mortgage insurance or refinance into a first and second mortgage loan,” Mr. Thomas said. “You need to have a good credit score of at least 700 or higher to qualify for two loans, but this is a much better option than paying PMI because the interest is tax deductible on both loans. You can pay off the second loan more quickly if you get a bonus or commission or have some other windfall.”

Mrs. Callis suggested that borrowers work with a lender who will take the time to review their current mortgage and discuss their options. NIHFCU offers its members and consumers who are eligible for membership a free annual mortgage checkup to see if various scenarios can save them money.

“Sometimes even if someone needs to pay PMI, it makes sense to refinance because they will save so much by lowering their interest rate,” Mrs. Callis said. “Besides, PMI only needs to be paid until the loan-to-value reaches 80 percent, and then it will be dropped.”

In addition to the options of an FHA loan, two mortgages or one mortgage with PMI, borrowers with low equity also may want to consider paying down their mortgage balance with a “cash-in” refinance.

“Some consumers simply want to reduce their loan balance with some of their cash, but others use a cash-in refinance to get a better interest rate,” Mr. Thomas said. “For example, if someone in the D.C. area has a loan balance of $631,000, they may want to pay down their balance to $625,500 in order to get the lower conforming-loan rate rather than a jumbo loan.”

Mrs. Callis suggested that homeowners work with their lender to set up an automatic payment system that results in 26 payments per year that add up to 13 monthly payments. One extra payment per year can shorten your loan term by several years, regardless of whether you refinance.

If credit, income or job history issues are delaying your ability to refinance, a lender can work with you to create a plan to help you qualify in the future.

“I recommend that consumers go first to their lender before attempting to pay off a particular debt to fix their credit,” Mr. Mendelson said. “Many lenders have credit-score simulator software that can quickly compare the boost to your credit score for specific actions, such as paying off your car loan or eliminating a credit card balance.

“For example, one person could pay off an old $250 collection and boost their score three points, but if they get the creditor to remove the collection from their report after it is paid, their score can go up 38 points.”

Mr. Thomas said every loan goes through an automated underwriting system that takes into account not only borrowers’ credit scores, but also job stability, assets, the borrowers’ debt-to-income ratio and the loan-to-value on the property. Strength in one of those areas can offset weakness in another.

“The typical maximum debt-to-income [ratio] is 50 percent to qualify for a loan,” Mr. Thomas said. “If you want to improve your ratio by paying something off, I would recommend discussing this first with a lender who can help you figure which debt would be the best to pay off.

“Once you’ve paid off a debt, the cash is gone, and you can’t get it back, so you want to make sure you do it right.”

Homeowners who have been unemployed may be concerned about their job history, but lenders say that as long as you are employed when you apply for a loan and have an explanation for any recent employment gap, it shouldn’t be an issue.

Problems based on job history are mostly a concern for self-employed borrowers, who must provide two years of tax returns. The income from those returns will be averaged. Self-employed borrowers with a declining income or a wide gap between the two years of income may have more trouble qualifying for a loan, but they can be helped if they have significant home equity, sufficient assets and a high credit score.

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