In this muckety-muck lending environment, does it make sense to re-finance your SECOND home? Can you even save money? I asked my good friend Marcus McCue, Vice President of sales for Guardian Mortgage Company:
This is an exceptional time for owners of second homes to refinance. FRM (fixed-rate mortgages) are still at extremely low rates. With the 30-year FRM in the low-5%s and the 15-year FRM in the mid-4%s, refinance opportunities abound for borrowers with mortgage rates at 5.50% or greater. Doing so could reduce the monthly payment for the same loan product or reduce the term of their loan without little or no increase the monthly payment on the mortgage.
While there is a possibility that rates could drop even farther, the economic pressures that created today’s low rates make it hard to believe that there is enough additional downward pressure to make them fall even more. At some point, the rates will be at the lowest point for long-term fixed-rate mortgages and many of my peers believe we are there now. I believe there is a greater likelihood that rates will increase vs. decrease in the coming weeks.
Which borrowers will benefit most by refinancing now?
The best candidates for a refinance are borrowers who have mortgages in the 5.50% to 7% range and who want to either refinance the loan to decrease their cash outflow on the mortgage or reduce the loan’s term without much change to their monthly payment. For example, a borrower with a 30-year fixed-rate mortgage at 6.25% can refinance to a 15-year FRM at 4.125% with only a $150 increase in the monthly payment. Rates at 6.250% were the standard in the fall of 2008, so anyone who purchased or refinanced their home between 2004 and 2008 should investigate whether refinancing is prudent in light of closing costs.
An old rule of thumb was that those with rates 1% higher than current rates would benefit from refinancing. Today, there is no firm rule to determine if refinancing a loan is a smart move. The borrower should contact a mortgage professional to determine what costs will be incurred, the savings created by refinancing, and the break-even point. As long as the borrower will remain in the property beyond the break-even point, the lender can provide an estimate on the interest or cash-flow savings they will secure.
Have there been any changes that would make a second home refinance more attractive today than in the past?
As of April 1st of this year, second home rates are about 0.125% lower than they have been in the past on conforming loans. A change to the required rate adjustments from Freddie Mac and Fannie Mae have removed a risk adjustment for the property status being a “second home”. This means that prior to April 1st, 2011, the rate on a mortgage for a second home was typically 0.125% higher than a primary residence, not because of the credit quality or risk of the borrower, but simply because the property status was a second home and not a primary residence. With this rate adjustment removed, the second home rates and now the same as primary residence rates.
Is refinancing more difficult now than in previous years?
Refinancing mortgages is not necessarily more difficult today as compared to previous years. However, borrowers should understand that a new appraisal may be required even if they have just refinanced or purchased the home in the past couple of years. Given the challenges that have faced the residential real estate market, there are fewer and fewer waivers of appraisal available to lenders.
The key to approval and ensuring you get the best possible rate is your debt-to-income ratio (DTI Ratio) and credit score. Gone are the days when an approval was easily granted to a borrower with significant cash assets and little income. Verifiable income compared to monthly debt obligations is a critical focus of loan approval in today’s underwriting environment. In addition, the better the credit score the better the mortgage rate and lower the lender costs. This is especially important in refinancing where your focus is to get the lowest mortgage rate to gain monthly payment or interest savings over time.