Thinking about buying a home or refinance your mortgage? Now is a good time
A new wave of mortgage refinancing has been unleashed recently by the low interest rates in the United States, even though banks have reservations about offering loans that carry a lot of risk
Alberto Garcia recently refinanced the mortgage on his Miami Lakes home at a very good interest rate. The bank where he has had a line of credit for several years gave him a $95,000 mortgage at a 2.9 percent interest rate that will allow him to finish paying the loan in 15 years.
That’s a financial move that allows him to feel secure in the face of instability in the labor market, and it means a substantial savings over his previous mortgage, at 4.8 percent for 30 years.
His case is not unique, as shown by the most recent reports by the Mortgage Bankers Association (MBA).
Applications for mortgages rose by 9.3 percent from the week of June 1st through the 5th, according to a June 10 report by the MBA. Refinancings rose by 11 percent during the same period – and were 80 higher than in the same week in 2019.
“Buying activity rose for the eighth week in a row and was, notably, 13 percent higher than one year ago,”said Joel Kahn, MBA vice president for economic and industrial
But the high levels of unemployment and the low level of offers of houses for sale could halt the expansion of the mortgages and refinancing, Kahn added.
García agreed to share his experiences during the refinancing process, and recommended that before deciding on a bank borrowers should check not only the interest rates offered but the closing costs involved.
“Don’t choose the first one who speaks. The small type can take away a lot of your money and you don’t even notice,” he said.
Garcia also said borrowers should be well prepared, because the process of obtaining a loan has become much longer and more complex since the real estate crisis in 2008, when lenders tightened the requirements for qualifying for mortgages.
“There’s been a number of loans that started and fell apart because halfway through the loan the people lose their jobs or see their hours cut,” said Leonardo González, a loan officer with GMC Financial in Ft. Lauderdale.
González confirmed that big banks have made it tougher to obtain mortgages, requiring borrowers to have a credit rating higher than 700 and put a down payment of 20 percent of the amount to be financed.
He added that private banks, like the one he works for, can be more flexible and ask for a credit score of more than 630 for a conventional loan and 530 for mortgages guaranteed by the Federal Housing Administration, which also allows for a down payment of 3.5 percent of the purchase price, and carry lower closing costs.
Verifications of employment are becoming more strict at the start of the borrowing process and before the mortgage is issued because “there’s a lot of fear about people losing their jobs – the numbers show that – and a lot of companies are cutting back hours,” said Gonzalez.
The borrower’s income and debts are fundamental when it comes to approving mortgages, aside from the person’s credit rating.
These are some of the parameters used by lenders to fix the interest rates for a mortgage. Currently, the rates start at about 2.85 for a 15 year mortgage and at 3 percent for a 30 year loan.
Should you refinance debts and mortgages?
To figure out whether it’s good for you to refinance your mortgage or take out a loan to repay other debts at a lower interest, two basic factors must be taken into consideration:
▪ Does your current mortgage carry an early payment penalty? If so, it’s probably not worth refinancing it.
▪ Do you have 20 percent or more equity on your home? That’s going to be required for a new mortgage.
▪ Do you plan to stay in the house for seven years or more. If the answer is no, then it won’t be advantageous to refinance because you will not recover the closing costs.
▪ What are the closing costs for the new mortgage? Will they be higher than what you expect to save with a lower interest rate? In that case, it’s not worth going through the cumbersome process of qualifying.
Many people are now getting lines of credit in case of emergencies, like losing their jobs. But today it is more difficult to obtain those credit lines, and they are generally lower. They can be useful if needed. But it would be better to contact your community bank because many of the big banks are not issuing lines of credit against the value of homes.
It’s not all about low interest rates
González said that although the temptation of low interest rates may drive many people to make important financial decisions, he recommends caution with such an important decision at a time when the U.S. economy is in crisis.
If you have decided to get a mortgage, take these issues into consideration:
▪ Know whether the interest rate is fixed or adjustable.
▪ Is there a penalty for early payment of the mortgage?
▪ Is there a requirement for Private Mortgage Insurance, usually needed when the borrower puts down less than 20 percent of the price or if the deal involves an FHA loan. The cost of the insurance would be added to the monthly payments.
This story was originally published June 19, 2020 at 7:00 AM.
