September 2011: Get Real

By now, saying that this real estate market is difficult has a certain broken-record quality. But even getting a refinance loan is “tougher than it used to be,” says Phillip Mahone, co-owner of Mahone Mortgage, LLC in Charlottesville. “The biggest issue right now is the decline in property values.” 

In fact, according to Zillow Inc., in the first quarter of 2011, property values declined by 3 percent nationwide. (In the second quarter, the decline slowed considerably; Bloomberg reports that the number of homeowners who were “upside down,” meaning they owed more than their houses were worth, decreased to 26.8 percent from 28.4 percent.) 

The good news is that even a homeowner who is upside down can refinance. 

“If the value has gone down, and if the mortgage has been sold by the original lender to Fannie Mae or Freddie Mac, there are programs that allow high loan-to-value financing, even up to 125 percent” of the value of the property, says Lee McAllister of Fulton Mortgage Company. 

Peter Cefaratti of New American Mortgage agrees. “You are going to pay a somewhat higher rate than somebody else who has more equity and can qualify, but it’s still possible,” he says. 

Regardless of the status of the home, however, the most important number good lenders look at for a refinance loan, or a purchasing loan for that matter, is the credit score. 

“If your credit score is really bad, say below 620, you are probably not going to be able to refinance,” says Cefaratti. “Even if you have a lot of money and a lot of income and a lot of equity and your credit score is bad, chances are you are not going to get a loan.” 

Mahone says credit scores got more and more important as the housing market began to crumble. 

“Not only can the credit score affect whether [homeowners] can take out a loan or not, but it’s going to affect the price they will get,” he says—higher interest rates, higher points. “Having your credit clean is majorly important.”

What’s the number one way to clean it? Minimize the use of credit cards. “It would be good to make sure that your credit card balances are not more than 30 percent of the credit limit that you have,” says Cefaratti. 

There are many reasons why homeowners decide to refinance. Some people want to lower the monthly mortgage payments, while others want to change the term of their loans, say from a 30-year fixed to a 15-year fixed, in order to pay them off sooner. 

“The other reason that people refinance is to consolidate debt or to combine a first and second mortgage,” says McAllister. 

Yet, not everyone will benefit from refinancing. 

“You have to look at the benefit you are getting versus what you could do with the money you have to bring in,” says Cefaratti. “If it’s only a couple of thousand dollars, you wouldn’t want to drain your bank account to buy equity in your property so that you could refinance.” 

To figure out whether a refi is worthwhile in the long run, a good rule of thumb is to calculate the amount of time it will take to see the benefits. If it’s more than 48 months, and you have plans to move elsewhere, then skip refinancing—along with the worry about whether you’d qualify to begin with.

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