Is Now a Good Time for a New Mortgage or Refinancing Your Current Mortgage?

young_couple_house.jpgAugust 2010

Current mortgage interest rates in the U.S. are historically low. If you're considering buying a new home, there's a large stock of new and existing homes for sale, many at much lower prices than at the height of the real estate boom. Even with this good news, however, mortgage loan applications in July 2010 hit new lows.

Why aren't more people taking advantage of what appear to be real opportunities? Several factors may play a role. The slow economy and concerns about job security have many people sitting tight. In addition, everyone has heard that loans are harder to get because lenders have tightened lending criteria and have less money to loan. That's not the whole story, however. Many lenders, particularly credit unions, are in good shape financially and are ready to make new mortgages or refinance existing mortgages for qualified consumers.

If you are interested in buying a new home or refinancing the mortgage on your current home, is now a good time to act? And what qualifications will give you the best chance? This report covers some of the basics.



Yes, it's a great time to get an affordable mortgage.

As mentioned, if you have the right personal financial qualifications and have located the right property, today's market offers real opportunities to get an affordable mortgage or refinance a mortgage to meet your needs. A mortgage originator at PMCU, for instance, will be happy to talk to you about the mortgage options they offer.

What are the most important qualifying factors for you, the borrower?

  • Income
  • Employment stability
  • Debt and debt to income ration
  • Credit history and credit score
  • Savings and total assets

What is important about the property?

  • Appraised value
  • The type of property
  • Location

What factors affect qualifying for a mortgage?

Every lender has guidelines that determine what loans they can make. These guidelines generally set out requirements for the borrower and the borrower's personal finances, for the property being purchased, and for the type of mortgage loan (such as fixed-rate or adjustable rate), along with other factors. Underlying the individual guidelines set by each lender are the guidelines set by Fannie Mae® and Freddie Mac®, the organizations that help keep the mortgage market liquid by buying loans from retail lenders or by government agencies sponsoring certain types of mortgages such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Typically, individual lenders will conform to or be stricter than these guidelines. That's why it's important to compare requirements and terms when shopping for a mortgage or refinance.

What qualifying factors for you, the borrower, are most important?

Lenders look at several factors to help determine if you are qualified to pay back the amount you wish to borrow at the terms of the mortgage loan. In some cases, these factors can also determine what interest rate you receive.

Income. Lenders require documented proof of your income. "Undocumented" loans were one problem that contributed to the major credit crisis and soaring foreclosure rate over the last two or three years. Expect to share your recent tax returns and other documentation.

Employment stability. Many lenders now require that mortgage applicants have held their present jobs for two years or longer. Because this varies among lenders, check requirements, particularly if you've recently changed jobs because of a layoff.

Debt and debt-to-income ratio. The total amount of debt that you have will help determine the amount of mortgage you may qualify for. Lenders look particularly at "debt-to-income" ratio (DTI). This describes the percentage of your gross income (before taxes) that goes to pay debts (and certain other payments). There are two kinds of DTIs typically considered.

The front-end DTI is the percentage of gross income that goes to pay for the mortgage and required associated costs—typically loan principal, interest, mortgage insurance, taxes, and hazard insurance (PITI). Typical guidelines for conventional loans set this figure at 28% of gross income, although the figure can vary.

The back-end DTI is the percentage of gross income that goes to pay total debt. This includes credit card and installment loan minimum payments, car loan payments, student loan payments, alimony and child support payments and legal judgments combined with the mortgage costs. This combined debt under typical guidelines for conventional loans can only equal 38% to 40% of gross income. Again this figure can vary depending on the lender and type of loan. Using these mortgage calculators can help you look at your figures.

Credit history and credit score. Lenders also look carefully at your credit report to see how you have used credit in the past and what type of problems (such as late payment or bankruptcy) you may have had. Your credit score gives them a quick summary of your credit worthiness.

Many factors contribute to your credit score but one of the most important things you can do is to pay all your bills on time, every time! If you have large balances, pay them down. For more about building your credit scores and checking your credit report, see our Tips for Improving Your Credit Score report.

Savings and total assets. Beyond income earned through your regular employment, your other assets add detail to your financial picture and how you've handled your money. For example, the money you have saved for a down payment or have in general savings, investment accounts, and retirement accounts and any equity in your existing home are all assets.

young_family_front_steps.jpgWhat's important about the property you wish to buy or refinance?

Appraised value. The appraised value of the property should be in the range that you can afford based on the down payment or equity you have in hand and the loan amount for which you qualify based on type of mortgage and interest rate.

The type of property. Terms and mortgage options may differ, for example, for stand alone single family residences, duplexes, and condos. A case in point: if you are buying a condo, lenders may have a limit on what percentage of the units in the total property can be rented rather than owner-occupied.

Location. This factor may be of more importance to you than the lender. Depending on neighborhood or access to good schools, the estimated value of similar houses may vary widely. This gives you an opportunity to match your needs to your budget, including the mortgage loan you can qualify for.

Does the type of mortgage make a difference?

Yes. There are a variety of mortgage options. These include fixed and variable rate mortgages for different terms. The variables make a difference in how mortgage products are priced even before your financial qualifications are taken into account. For example, adjustable rate mortgages typically have a lower introductory interest rate than the long-term fixed interest rate for a fixed-rate 15 or 30 year mortgage. However, the adjustable rate is subject to reset after the introductory period as indicated in the loan terms. That's why it's important to compare all the terms of mortgage options. New regulations, for example, on some adjustable mortgage options require that borrowers show they can qualify for the loan if it were to reset to a 2 percent higher interest rate. You can read more about different types of mortgage options at our online Mortgage Guide.

For what reasons and when can refinancing your mortgage make sense?

Although refinancing a mortgage can be done for several specific reasons, the underlying objective is to save money.

To save money on interest. Refinancing at a lower interest rate and/or for fewer years can reduce the interest you pay out over the total term of the mortgage. Just because a loan rate drops, however, doesn't mean you'll automatically save money. It's important to compare the total cost of refinancing to the money saved. It's also important to determine how long it will take you to realize the savings (the "break even" point). For example, if you plan to sell your house in four years but it will take six years to reach the point where the cost of refinance equals the savings, then it doesn't make sense to refinance to "save" money because you typically will not. Using refinancing calculators can help you compare savings and costs.

To adjust the term of your loan. Perhaps you'd like to shorten the term of your loan to increase equity or own the home "free and clear" by the time you retire. Financing at a lower rate may help you meet that goal without increasing payments beyond affordability. Or you might want to extend the term of the loan to lower payments, although that may typically increase the overall interest you pay on the loan.

To change terms. For example, you may wish to switch from an adjustable rate mortgage to a fixed rate mortgage or to opt for a different type of adjustable rate mortgage.

To take cash out. Sometimes it can make good sense to use the equity in your home to finance a worthwhile expense such as home improvement. In certain cases, it may also make sense to use home equity to consolidate debts. However, consumers should carefully consider risks. Talk about your goals with your lender. Using home equity as a "piggy bank" for purchases such as vehicles or vacations or even debt consolidation helped get some people in trouble during the recent housing bust—because they had taken so much equity out, when housing values fell they then owed more money than the value of the home.

A Consumer's Guide to Mortgage Refinancings from the Federal Reserve Board offers a good overview of facts and issues related to this subject.

So is now a good time to get or refinance a mortgage?

Yes—if you do it right. You can start doing your homework by checking out the mortgage options offered by PMCU and studying our Mortgage Guide and Home Buying Guide.


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