Refi boom might not follow bailout |
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Another myth is that the rate has to fall 1 percentage point or 2 percentage points before refinancing is worth it.
That's not necessarily true. "It depends on your loan size," Kuiper says. "Half a percent might be worth it. A full point surely
makes it worth it."
The bigger the loan, the more you save every month by refinancing at a lower rate. But you have to account for how
long you plan to remain in the house. If you plan to move out within two or three years, refinancing probably doesn't make sense
because the closing costs are greater than the total savings from reduced monthly payments.
Reasons you can't refi
Kuiper toils in western Michigan, where prices never skyrocketed and never plummeted, either. They have fallen, though, and that
complicates matters for people who want to refinance. "If you did 100 percent financing last year, you may not have experienced the
appreciation you need to refi," he says.
If you live in South Florida, Southern California,
Phoenix, Las Vegas or another market where the bubble popped violently,
you might not be able to refinance, even if you made a 20 percent
down payment two or three years ago. Prices have fallen so far in
those markets that many homeowners owe more than their houses are
worth. Those people can't refinance unless they have enough cash
to make up the difference between the loan balance and the home's
value.
Even if the house is worth more than the mortgage balance, a refinance might not save any money if the new loan would
require mortgage insurance. Generally, mortgage insurance is required on home loans for more than 80 percent of a house's value. Until
recently, a lot of borrowers avoided mortgage insurance by getting two mortgages: A primary loan for 80 percent of the home's value and
a home equity loan (or line of credit) for the rest. The second mortgage was called a piggyback loan.
Piggybacks are almost extinct. Mortgage insurance has taken their place. The price of mortgage insurance will force some
would-be refinancers to decide to keep their existing loans.
Then there's the matter of lending standards. Low-documentation mortgages were popular during the housing bubble. A lot
of these borrowers exaggerated their incomes so they could qualify for loan amounts that they otherwise wouldn't have been able to qualify
for. Now every lender wants documentation of income and assets. That requirement stands as a barrier to refinancing for some who currently
have low-documentation or stated-income mortgages.
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