Checking the news stories this morning, I found this little gem: A refinancing rush as interest rates come down
It’s time for me to call semi-bullsh*t here. Let’s take a look at some of the specifics behind this flood of new refinances.
Homeowners across the country did the same Wednesday. Mortgage brokers reported a surge of calls from borrowers seeking to take advantage of the Fed’s extraordinary decision. Some brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments.
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A strong credit record, especially in the market, is considered to be over 700. Unfortunalty the average credit score in the United States is 693. If you do not fall above this number, good luck at getting a refinance. Even if you do, you may be out of luck. Look at that second item – hefty down payments.
A number of lenders are requiring up to 10% down for a refinance. Others may be able to work with borrowers for less but a higher interest rate. However, let’s take a worst case situation and assume that there is little equity, that means a large number of people who wish to refinance need to be sitting on a stack of cash. If you have a 100K mortgage, and the lender requires 10% down to refi, that means a person may need roughly 10K simply to lower their mortgage.
Now what about the people who have lost equity in their house, how will the “refi” boom help these individuals? If your house value is down roughly 20% and you have little to no equity, you will not be able to refi UNLESS you have that large stack of cash we just spoke of.
Finally, people – and banks – have not learned from the current situation we are in.
Lisa Wallwork, 37, and her husband, Shawn, are in the process of refinancing the mortgage on the house they’ve owned for five years in Tolland, Conn. They pulled it off the market in September after their house didn’t sell for more than a year.
“We wanted to move up to a bigger and better house,” she said.
Instead, the couple are refinancing their $185,000 mortgage, pulling out equity to remodel their kitchen and getting a new front door. And they still expect to save up to $300 a month in the process.
(Emphasis add)
What does this remind you of? People using their homes as credit cards once again. Pull out equity in order to have cash while increasing your debt. This is part of what caused the current economic downturn we are facing.
It is critical to question all data that is in the press these days. Yes, there will be an increase in mortgage related activity but only a small portion of the population will be eligible to reap the benefits. Having 3 requests in one day (making the number up) may seem like a boom if you previously had zero.
This wave of refi’s is helping to establish a new floor in housing prices, true, but there is so much pain in the market that floor may still be years away.
