Mortgage Refinance

On Wednesday, March 18, 2009, the Federal Open Market Committee (FOMC) of the Federal Reserve voted to keep short-term interest rates steady at near zero percent. In the press release issued that afternoon, the Fed also announced plans to buy up to $300 billion-worth of long-term Treasury securities from the Treasury Department, and purchase a whole lot more mortgage-backed securities from agencies like Fannie Mae and Freddie Mac. The primary goal of these Fed actions was to keep mortgage rates down and, so far, these specific tactics have been working.

The Fed's plan worked. Since 2009, mortgage rates have moved lower at a steady pace, and continue to hover at record-low levels.

At the end of 2012, the Fed decided to go all-in to fix the housing sector, and return the US economy to prosperity. They committed to spending many billions per month to purchase both mortgage-backed securities and Treasury debt -- a staggering experiment macro economics. Both actions will continue to place considerable downward pressure on mortgage rates during all or most of 2015.

But it won't prod banks to increase their mortgage lending. Despite the super-low interest rate environment, getting approved for a conventional mortgage is not easy, even for the most responsible borrowers. Banks are flush with liquidity, but are very gun-shy, having learned some hard lessons during the 2008 financial crisis and resultant Great Recession.

Here are some tips that both refinancers and new buyers should keep in mind:

• Home value are finally on the upswing in many parts of the country, but the housing sector is not out of the woods.
  
  Prospective homebuyers should try their best to get immediate equity. This is accomplished by negotiating a price for a home that's lower than the lender's appraised value of the home. If successful, the new homeowner gets to move into a home with immediate equity, a substantial plus in the current housing market.
  
  
• First-time homebuyers who want to get the best possible home loan deal should have their financial house in perfect order before applying. Subprime lending is out and old-fashioned lending standards are back in. Prospective buyers should:
  
  
  • be prepared to put at least 20% down, unless you opt for a FHA home loan, which allows a 3.5% down payment. Keep in mind, the mortgage insurance on FHA loans can be expensive, so carefully analyze the numbers.
    
    
  • be ready to provide solid proof of income,
    
    
  • improve their debt-to-income ratio by reducing or eliminating any credit card debt, and
    
    
  • try their best to get their FICO credit score above 740.
    
    
• Both new homebuyers and refinancers can get free access to the credit reports that lenders use by visiting www.AnnualCreditReport.com, a website created via Congressional mandate. A free report from each of the three consumer reporting agencies -- TransUnion, Experian and Equifax -- is available at no cost every 12 months. Check for errors; if mistakes are found, don't hesitate to dispute any and all inaccurate and derogatory items.
  
  
• A new homebuyer who has a great credit score, strong, confirmable income and plenty of money to put down may be able to find a mortgage rate below 4%, as long as the loan isn't jumbo or superjumbo in size (a jumbo mortgage is a home loan above $417,000, while a superjumbo is more than $650,000.) While it's possible to find a rate below four percent on a jumbo mortgage, the odds are not good.
  
  

  The same holds true for refinancers looking for a jumbo or superjumbo home loan refinance.

• For both new buyers and refinancers, it's important to understand what a no-cost mortgage loan or a no-cost refinance loan really means. "No cost" does not mean that closing costs (also known as settlement costs) have been erased. It means that the closing costs will be factored into the interest rate associated with the loan. Of course, this also means that, all other things being equal, the interest rate associated with a no-cost mortgage will always be higher than one where the borrower pays the closing costs up front.
  
  

  And there's one more distinction to pay attention to: the difference between a no-cost mortgage and a no-cash mortgage. "No cash" means that the closing costs will be added to the balance of the amortized loan, and the borrower will pay these costs over time. This is a very important distinction, because the borrower will pay interest on any and all fees added to the loan balance.

  Don't be intimidated by all these details. Use one of the many free mortgage calculators available on the Internet to figure out how much your loan is going to cost you. Remember that a "point" is simply a percentage point, so with a $200,000 mortgage that has an interest rate of 5% plus 1 point, the "point" will cost this borrower one percent of $200,000, or $2,000. Easy.

• Homeowners who want to refinance but can't because they owe more on their home than their home is worth (also known as "upside down") should focus their time and energy on making more money. Adding a part-time job or starting a side business will bring extra income, income that can be used to make extra payments on your mortgage. Sell anything and everything you can on Craiglslist, and use that cash to give your biggest investment the strongest possible equity position. Negative equity is never a good thing, be it with your house, your car....anything.

Both new homebuyers and refinancers should be prepared to do lots of shopping around, not only to get as many free quotes and good faith estimates as possible, but also because many lenders are overwhelmed with applications right now and may turn away even the best borrowers. Borrowers who aren't confident with their deal-hunting or negotiating skills can seek help from mortgage professionals, but they should also consider buying highly recommended books on mortgages from their favorite online bookseller.