Refinancing a 'no-brainer'
By Dave Dreeszen ddreeszen@siouxcityjournal.com | Posted: Sunday, January 11, 2009
SIOUX CITY -- Looking to free up cash by refinancing their homes at the lowest rates in a generation, tri-state homeowners have flooded area lender offices in recent weeks.
"It's been very busy. I'm taking five, six, seven applications a day,'' said Chad Gritzmaker, a mortgage originator with Central Bank in Sioux City. "I'm working from 6 in the morning to about 5:30 at night.''
Following a national trend, other tri-state banks also report a big increase in refinancing business.
At Sioux City-based Vantus Bank, the volume of home loans has jumped about 60 percent since mid-December, said Roxanne Bobolz, corporate vice president, residential lending manager.
"By far, the majority of those are refinance applications,'' she said.
Mark Roos, branch sales manager for Wells Fargo Home Mortgage in Sioux City, said his office saw an immediate jump in refinancing applications after the Treasury Department announced in late November that it would buy $500 billion in mortgage-backed securities guaranteed by mortgage giants Fannie Mae and Freddie Mac.
The purchase program, coupled with a rate cut by the Federal Reserve, quickly drove down the price of mortgages. Freddie Mac reported last week that the average rate for a 30-year fixed mortgage had tumbled for the ninth straight week to 5.1 percent, the lowest recorded since 1971. That's down nearly 1.4 percent from the end of October.
In the tri-state area, several lenders last week quoted base rates in the mid-4 percent range.
Many local residents who took out loans at higher rates are finding that refinancing is a "no-brainer,'' Ross said.
"If you're going from 6 1/2 rate down to a 4 5/8 on a 30-year fix, on a $200,000 loan, you're going to generate an extra $200 a month in your budget,'' Bobolz added.
Bankers say the falling rates have prompted many tri-state homeowners to shorten the term of their loan, saving more interest payments in the process.
"If they can reduce their amortization schedule, going from a 30-year to a 15-year, they're trying to do so if they can swing it,'' Gritzmaker said.
Others borrowers are replacing adjustable-rate loans with fixed ones. Three or five years ago, there was a wide spread between rates for adjustable and fixed rates, Roos said. Because many of the adjustable-rate loans are now set to reset at higher rates, it makes sense to convert to a fixed-loan, he said.
So far, area lenders say most refinance applicants are qualifying. "For every 10 I get in, I'm probably getting at least nine through,'' Gritzmaker said.
However, in the aftermath of this year's subprime mortgage crisis that forced the federal government to take over Freddie Mac and Fannie Mae, it's not as easy to obtain a loan as it once was, according to lenders.
Individual refinancing rates vary depending on an applicant's credit rating, job history and debt load, as well as the size of their down payment and their home's value.
"We can't just quote a rate like we used to,'' Bobolz said.
Nationwide, a decline in real estate values has eroded the equity of some homes so much that owners can't qualify for a new loan, under the new rules. Because the Siouxland housing market largely avoided the boom-bust cycle of some larger, fast-growing metro areas, area lenders say few local homeowners are "upside down'' on their loans -- owing more than the value of their home.
A separate appraisal underwriting also is now required as part of the application process. To satisfy Freddie Mac standards, the appraisal generally must include a minimum of four comparable sales in the last six months, Bobolz said.
For some homeowners, particularly those living in smaller towns or on acreages, it can be challenging to meet those requirements. Some area lenders say that's increasingly forced rural homeowners to turn to USDA-backed Federal Housing Administration loans.
Added work
The refinancing frenzy has brought welcome added business not only to financial institutions and mortgage brokers, but also title companies and appraisers -- an industry that generally has suffered the effects of a sagging real estate market.
Rex Gregg and his wife, Sheila, who operate Davenport Appraisal Services, said the Sioux City business has had to add extra help to keep up with the surging demand for appraisal orders for refinances in recent weeks.
"About every weekend, we're working Saturdays and Sundays. We start at 6:30 in the morning and get done at 9:30-10 at night,'' Gregg said.
The surge in applications has lengthened the turnaround time for refinance applications by days and even weeks.
"People have to be patient. We're trying to move things through the pipeline as fast as we can,'' Bobolz said.
Along with enticing existing homeowners to refinance, local bankers say they hope the historically low rates nudge some new buyers into the market.
"Real estate is a sound investment, that coupled with low interest rates, there's not a better time to buy a home right now,'' Roos said. "You can qualify for so much more house because of the lower interest rate.''
Roos cautions consumers, looking to buy or refinance, to avoid waiting too long for rates to go even lower.
"They could find themselves in the outside looking in and not be able to get that rate,'' he said.
Are you better off refinancing your home mortgage? Here are some key questions to consider, according to area lenders the Journal polled.
How do the old and new rates compare?
Bankers often use a 1 percent rule -- if a homeowner's current rate is 1 percent more than the available new rate, he or she should refinance, but that doesn't always hold true. Some lenders suggest a refinance could make sense if the difference is as little as 1/2 percent to 5/8 percent.
In the tri-state area, several lenders last week quoted starting rates in the mid- to high-4 percent range, the lowest in more than 35 years.
How long will you be in your home?
If you don't intend to stay at least three years, you probably won't be able to recapture your closing costs. For instance, if your closing costs total $3,600, the monthly payment on your new loan should be about $100 a month less.
"If they plan on moving any time soon, I'd be the first one to say it's probably not a good time to refinance the mortgage,'' said Mark Roos, branch sales manager for Wells Fargo Home Mortgage in Sioux City.
What do you want to accomplish?
If you to want reduce your interest rate, adjust your loan term or both, you would apply for a rate-term refinance loan, which provides just enough to repay the balance of the existing mortgage. If you want to convert some of your home equity into cash proceeds, you should opt for a cash-out refinance loan, an amount that exceeds the current mortgage balance.
Lenders note that rate-term loans generally carry a lower interest rate than cash-out loans.
What's your financial and credit history?
Because of tighter underwriting standards, it's not as easy to get a home loan as a year or two ago. To qualify for the absolute lowest rate, you likely will need a high credit score and be able to document your income and employment history.
Roos noted that loan applicants now must present copies of a recent paycheck stub and their W2 forms for the last two years, and verification of the source of their down payment, such as a checking or savings account.
Self-employed individuals are required to present copies of their tax returns from the last two years.
What's your home's value?
How much do you owe on your loan, versus how much it's worth?
A separate appraisal underwriting also is now required as part of the application process. To determine the market value of your home, appraisers generally must gather at least four recent sales of comparable properties in your neighborhood.
"The name of the game is truly what is the property valued at,'' said Roxanne Bobolz, corporate vice president, residential lending manager for Vantus Bank in Sioux City. "The rule of thumb generally is you now need 15 to 20 percent equity to have a smooth refinance experience.''
"It's been very busy. I'm taking five, six, seven applications a day,'' said Chad Gritzmaker, a mortgage originator with Central Bank in Sioux City. "I'm working from 6 in the morning to about 5:30 at night.''
Following a national trend, other tri-state banks also report a big increase in refinancing business.
At Sioux City-based Vantus Bank, the volume of home loans has jumped about 60 percent since mid-December, said Roxanne Bobolz, corporate vice president, residential lending manager.
"By far, the majority of those are refinance applications,'' she said.
Mark Roos, branch sales manager for Wells Fargo Home Mortgage in Sioux City, said his office saw an immediate jump in refinancing applications after the Treasury Department announced in late November that it would buy $500 billion in mortgage-backed securities guaranteed by mortgage giants Fannie Mae and Freddie Mac.
The purchase program, coupled with a rate cut by the Federal Reserve, quickly drove down the price of mortgages. Freddie Mac reported last week that the average rate for a 30-year fixed mortgage had tumbled for the ninth straight week to 5.1 percent, the lowest recorded since 1971. That's down nearly 1.4 percent from the end of October.
In the tri-state area, several lenders last week quoted base rates in the mid-4 percent range.
Many local residents who took out loans at higher rates are finding that refinancing is a "no-brainer,'' Ross said.
"If you're going from 6 1/2 rate down to a 4 5/8 on a 30-year fix, on a $200,000 loan, you're going to generate an extra $200 a month in your budget,'' Bobolz added.
Bankers say the falling rates have prompted many tri-state homeowners to shorten the term of their loan, saving more interest payments in the process.
"If they can reduce their amortization schedule, going from a 30-year to a 15-year, they're trying to do so if they can swing it,'' Gritzmaker said.
Others borrowers are replacing adjustable-rate loans with fixed ones. Three or five years ago, there was a wide spread between rates for adjustable and fixed rates, Roos said. Because many of the adjustable-rate loans are now set to reset at higher rates, it makes sense to convert to a fixed-loan, he said.
So far, area lenders say most refinance applicants are qualifying. "For every 10 I get in, I'm probably getting at least nine through,'' Gritzmaker said.
However, in the aftermath of this year's subprime mortgage crisis that forced the federal government to take over Freddie Mac and Fannie Mae, it's not as easy to obtain a loan as it once was, according to lenders.
Individual refinancing rates vary depending on an applicant's credit rating, job history and debt load, as well as the size of their down payment and their home's value.
"We can't just quote a rate like we used to,'' Bobolz said.
Nationwide, a decline in real estate values has eroded the equity of some homes so much that owners can't qualify for a new loan, under the new rules. Because the Siouxland housing market largely avoided the boom-bust cycle of some larger, fast-growing metro areas, area lenders say few local homeowners are "upside down'' on their loans -- owing more than the value of their home.
A separate appraisal underwriting also is now required as part of the application process. To satisfy Freddie Mac standards, the appraisal generally must include a minimum of four comparable sales in the last six months, Bobolz said.
For some homeowners, particularly those living in smaller towns or on acreages, it can be challenging to meet those requirements. Some area lenders say that's increasingly forced rural homeowners to turn to USDA-backed Federal Housing Administration loans.
Added work
The refinancing frenzy has brought welcome added business not only to financial institutions and mortgage brokers, but also title companies and appraisers -- an industry that generally has suffered the effects of a sagging real estate market.
Rex Gregg and his wife, Sheila, who operate Davenport Appraisal Services, said the Sioux City business has had to add extra help to keep up with the surging demand for appraisal orders for refinances in recent weeks.
"About every weekend, we're working Saturdays and Sundays. We start at 6:30 in the morning and get done at 9:30-10 at night,'' Gregg said.
The surge in applications has lengthened the turnaround time for refinance applications by days and even weeks.
"People have to be patient. We're trying to move things through the pipeline as fast as we can,'' Bobolz said.
Along with enticing existing homeowners to refinance, local bankers say they hope the historically low rates nudge some new buyers into the market.
"Real estate is a sound investment, that coupled with low interest rates, there's not a better time to buy a home right now,'' Roos said. "You can qualify for so much more house because of the lower interest rate.''
Roos cautions consumers, looking to buy or refinance, to avoid waiting too long for rates to go even lower.
"They could find themselves in the outside looking in and not be able to get that rate,'' he said.
Are you better off refinancing your home mortgage? Here are some key questions to consider, according to area lenders the Journal polled.
How do the old and new rates compare?
Bankers often use a 1 percent rule -- if a homeowner's current rate is 1 percent more than the available new rate, he or she should refinance, but that doesn't always hold true. Some lenders suggest a refinance could make sense if the difference is as little as 1/2 percent to 5/8 percent.
In the tri-state area, several lenders last week quoted starting rates in the mid- to high-4 percent range, the lowest in more than 35 years.
How long will you be in your home?
If you don't intend to stay at least three years, you probably won't be able to recapture your closing costs. For instance, if your closing costs total $3,600, the monthly payment on your new loan should be about $100 a month less.
"If they plan on moving any time soon, I'd be the first one to say it's probably not a good time to refinance the mortgage,'' said Mark Roos, branch sales manager for Wells Fargo Home Mortgage in Sioux City.
What do you want to accomplish?
If you to want reduce your interest rate, adjust your loan term or both, you would apply for a rate-term refinance loan, which provides just enough to repay the balance of the existing mortgage. If you want to convert some of your home equity into cash proceeds, you should opt for a cash-out refinance loan, an amount that exceeds the current mortgage balance.
Lenders note that rate-term loans generally carry a lower interest rate than cash-out loans.
What's your financial and credit history?
Because of tighter underwriting standards, it's not as easy to get a home loan as a year or two ago. To qualify for the absolute lowest rate, you likely will need a high credit score and be able to document your income and employment history.
Roos noted that loan applicants now must present copies of a recent paycheck stub and their W2 forms for the last two years, and verification of the source of their down payment, such as a checking or savings account.
Self-employed individuals are required to present copies of their tax returns from the last two years.
What's your home's value?
How much do you owe on your loan, versus how much it's worth?
A separate appraisal underwriting also is now required as part of the application process. To determine the market value of your home, appraisers generally must gather at least four recent sales of comparable properties in your neighborhood.
"The name of the game is truly what is the property valued at,'' said Roxanne Bobolz, corporate vice president, residential lending manager for Vantus Bank in Sioux City. "The rule of thumb generally is you now need 15 to 20 percent equity to have a smooth refinance experience.''
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