With mortgage interest rates hovering around 50-year lows, refinancing is an appealing prospect for many homeowners. I think this is especially true considering the stock market's August gyrations. Taking nervous energy and using it to focus on sure-thing money moves such as lowering payments or paying debt faster makes sense.
According to Freddie Mac's weekly rate survey, a 30-year, fixed-rate mortgage averaged 4.22 percent. Slice the term in half, and the rate is 3.39 percent for a 15-year, fixed-rate mortgage.
Problem is, refinancing isn't always possible for homeowners.
The key culprit? Home equity. More than 90,000 Minnesotans were saddled with negative equity in the first quarter, according to data from CoreLogic, with another 30,000 having next-to-no equity in their homes. While refinancing is possible with as little as 3 or 5 percent home equity, it may be less worthwhile after taking mortgage insurance and closing costs into account, said Alex Stenback, a mortgage banker with Residential Mortgage Group in Minnetonka.
If you don't have home equity, you still may qualify using a government refinancing program called HARP. Greg McBride, senior financial analyst at Bankrate.com, says HARP is "the Rodney Dangerfield of government housing programs ... all the attention goes to the loan modification program, which hasn't solved any problems." But HARP (for Home Affordable Refinance Program) can be tough to qualify for, especially for borrowers with second mortgages and mortgage insurance. Plus many homeowners who qualify have already taken advantage of this program.
Lenders also want to see consistent, steady income. "If they've had challenges with employment in the last two years, gaps in their employment, that would be the second-biggest challenge," said Kara Egan, vice president of Edina Realty Mortgage. "You'd typically need to be back on the job for six months," she said. Recent retirees or families relying on self-employment or contract income could also find it difficult to qualify.
Another hurdle for many burned by the recession is having a high enough credit score. The magic number to receive the very best rates is at least 740. You can still qualify for a loan with a score south of 740, but forget about getting a brag-worthy interest rate. But with today's low rates "most people have good enough credit to get the lowest rate they've ever seen," McBride said.
Here's a little-known tip for the credit-challenged but cash-flush. Surprisingly, for 15-year, fixed-rate mortgages, lenders don't adjust the rate up or down based on credit score. "If you're willing to step up and make the higher payment, they're willing to overlook credit blemishes, to a degree," said Dan Hughes, loan officer at Summit Mortgage in Plymouth. Generally, you still need a credit score in the mid-600s to qualify for a loan, but if you do, your rate will be as good as your neighbor scoring north of 800.
