Don't Bank On A Smooth Home Loan Refinancing

fencerider2 · 02-11-2007, 08:02 AM

I recently did a refi from my ARM to a 15yr fixed, made out like a bandit on year six and seven but then it got hairy.

Don't Bank On A Smooth Home Loan Refinancing
Skip directly to the full story.
By RUTH SIMON The Wall Street Journal

Published: Feb 11, 2007

With rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't.

In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low teaser rate that rises sharply after an introductory period.

Other borrowers are getting caught short by a changing housing market - one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are able to refinance but are finding it more costly than they expected.

These new challenges come as many borrowers who took out adjustable-rate mortgages are facing higher payments. "The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp.

The challenges for homeowners could increase if lenders continue to tighten standards and the housing market remains soft. The challenges facing borrowers are becoming more apparent as opportunities for refinancing are narrowing. Rates on 30-year fixed-rate mortgages have recently drifted higher. Rates on 30-year fixed-rate loans average 6.45 percent, according to HSH Associates in Pompton Plains, N.J., up from 6.16 percent in early December.

Best Bet: Refinance Now
"The best deals in going from an ARM to a fixed-rate are passing," says Doug Duncan, chief economist at the Mortgage Bankers Association. "If anything, rates are likely to move up rather than down."

Meanwhile, there are signs that some lenders are beginning to tighten their standards. The shift comes after a long period of liberal lending practices that made it easy for borrowers to finance 100 percent of a home's value or get a mortgage without documenting their income and assets.

In a survey released Monday by the Federal Reserve Board, roughly 15 percent of domestic banks reported that they had tightened credit standards on residential mortgage loans in the past three months, the highest share since the early 1990s.

This month, Wells Fargo & Co. will begin reducing by 5 percent the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio.

The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards." Investors who buy mortgage-backed securities have been growing more concerned about credit quality as defaults have increased.

Recent Buyers Feel The Sting
On Jan. 30, Fannie Mae, the government-sponsored mortgage finance company, tightened its standards for so-called interest-only loans, which let borrowers pay interest and no principal in the loan's early years.

Other homeowners are being flummoxed by lower appraisals. Those most likely to be affected bought a home or refinanced in the past year or two and have little, if any, equity.

Some borrowers are trying novel strategies. Charlotte Keyes, a program/project manager in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10 percent, Keyes is looking to refinance. Because she owes more than the home is worth, she plans on taking out a $13,000 auto loan and using the money to pay down her mortgage.

With ARMs, "the tag line you always hear ... is you can refinance with no problem," says A.W. Pickel, a mortgage banker with LeaderOne Financial Corp. in Overland Park, Kan., who is working with Keyes. "But it is a problem."

REFINANCING TIPS
Refinancing a mortgage can make sense for borrowers with adjustable-rate loans:
•Switching to a fixed-rate loan can provide peace of mind if you're worried about future rate increases and are planning on staying put for several years.

•Prepayment penalties can be a hurdle for certain borrowers, such as those with so-called option ARMs.

•With rates on even one-year adjustable mortgages close to 6 percent, it's likely to be difficult to lower your current rate significantly.

02-11-2007, 08:02 AM	#1 (permalink)
fencerider2 Puppet Masturbater	Don't Bank On A Smooth Home Loan Refinancing I recently did a refi from my ARM to a 15yr fixed, made out like a bandit on year six and seven but then it got hairy. Don't Bank On A Smooth Home Loan Refinancing Skip directly to the full story. By RUTH SIMON The Wall Street Journal Published: Feb 11, 2007 With rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't. In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low teaser rate that rises sharply after an introductory period. Other borrowers are getting caught short by a changing housing market - one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are able to refinance but are finding it more costly than they expected. These new challenges come as many borrowers who took out adjustable-rate mortgages are facing higher payments. "The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. The challenges for homeowners could increase if lenders continue to tighten standards and the housing market remains soft. The challenges facing borrowers are becoming more apparent as opportunities for refinancing are narrowing. Rates on 30-year fixed-rate mortgages have recently drifted higher. Rates on 30-year fixed-rate loans average 6.45 percent, according to HSH Associates in Pompton Plains, N.J., up from 6.16 percent in early December. Best Bet: Refinance Now "The best deals in going from an ARM to a fixed-rate are passing," says Doug Duncan, chief economist at the Mortgage Bankers Association. "If anything, rates are likely to move up rather than down." Meanwhile, there are signs that some lenders are beginning to tighten their standards. The shift comes after a long period of liberal lending practices that made it easy for borrowers to finance 100 percent of a home's value or get a mortgage without documenting their income and assets. In a survey released Monday by the Federal Reserve Board, roughly 15 percent of domestic banks reported that they had tightened credit standards on residential mortgage loans in the past three months, the highest share since the early 1990s. This month, Wells Fargo & Co. will begin reducing by 5 percent the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio. The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards." Investors who buy mortgage-backed securities have been growing more concerned about credit quality as defaults have increased. Recent Buyers Feel The Sting On Jan. 30, Fannie Mae, the government-sponsored mortgage finance company, tightened its standards for so-called interest-only loans, which let borrowers pay interest and no principal in the loan's early years. Other homeowners are being flummoxed by lower appraisals. Those most likely to be affected bought a home or refinanced in the past year or two and have little, if any, equity. Some borrowers are trying novel strategies. Charlotte Keyes, a program/project manager in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10 percent, Keyes is looking to refinance. Because she owes more than the home is worth, she plans on taking out a $13,000 auto loan and using the money to pay down her mortgage. With ARMs, "the tag line you always hear ... is you can refinance with no problem," says A.W. Pickel, a mortgage banker with LeaderOne Financial Corp. in Overland Park, Kan., who is working with Keyes. "But it is a problem." REFINANCING TIPS Refinancing a mortgage can make sense for borrowers with adjustable-rate loans: •Switching to a fixed-rate loan can provide peace of mind if you're worried about future rate increases and are planning on staying put for several years. •Prepayment penalties can be a hurdle for certain borrowers, such as those with so-called option ARMs. •With rates on even one-year adjustable mortgages close to 6 percent, it's likely to be difficult to lower your current rate significantly. Last edited by fencerider2 : 02-11-2007 at 08:08 AM.