Crunching The Numbers On Your Refinance

The Hartford Courant says you need to crunch some numbers before seeking out a mortgage broker or lender.

You are going to need a credit score of over 700 to refinance and at least 20% equity in your home. You should save at least one point in interest rates.

If your credit score is lower than 740, you will have to pay points. If it is under 700, you’ll have a hard time finding a lawyer.

Here’s more:

All this assumes, however, that your credit score is 740 or better. But if it is lower, points will get added to the closing costs. As credit scores drop, closing costs would increase — by a whopping $3,507 at 680.

When it comes to tapping into equity by taking out cash, other costs could pile on. The value of the property in the example has slid by 5 percent, to $285,000. Assume your credit score is 700 — a bit below the 740 or better that garners the best rates — and you want to take out $25,500 in cash, bringing the refinanced loan to $256,500 for 30 years.

That would leave just 10 percent equity. The refinance would then be subject to points, said Christopher Dannen, residential sales manager at People’s United Bank in Bridgeport.

You’d have a couple of options: pay the points up front and get the 5 percent rate, or choose a higher rate, without points.

At 5 percent, with 1.5 points — amounting to $3,848 — the monthly payment would rise by about $312, to $1,552. That includes now required mortgage insurance because the borrower’s equity has fallen below 20 percent, but not escrowed homeowner’s insurance or property taxes.

TMC reports:

Pallotta bought his single-family home eight years ago and took out a mortgage with a 6.25 percent interest rate, then took out a second mortgage in 2005 with an 8 percent rate. His newest mortgage, which will absorb the previous two and is for around $400,000, has a mortgage rate of 4.875 percent.

Low rates are spurring many homeowners to consider refinancing, said Robert Graybill, senior mortgage consultant at Scholastic Mortgage in Milford, who helped Pallotta with his loan process.

Determining when to finalize the deal, though, can be tricky for those aiming to get the best rates they can.

“It’s all timing,” Graybill said. “Everybody wants that crystal ball.”

Rates on 30-year mortgages dipped again last week but, on average, remained above 5 percent, according to Freddie Mac. The average rate on a 30-year fixed loan was 5.10 percent last week, down from 5.12 percent the previous week. At this time last year, the 30-year fixed-rate mortgage averaged 5.68 percent.


Lending restrictions on refinancing have become so prohibitive in many cases that borrowers who would have breezed through underwriting a couple of years ago are now facing a host of tough questions.

Some are locked out because declining values have sapped the equity out of their homes. Those who do qualify face higher fees that push up the cost of the refinancing, even for those with what were once considered strong credit histories. As the nation’s financial crisis has deepened, lenders have turned more cautious, not only worried about sliding home values, but also about borrowers’ ability to pay in the face of accelerating job losses.

“To get that low rate, you have to be a very good credit risk, and the deal has to be clean,” said Christopher Dannen, residential sales manager at People’s United Bank in Bridgeport, the largest bank based in Connecticut and a major mortgage lender.

A “clean deal” typically means having a credit score of 720 or better and 20 percent equity in the property, Dannen said. Long gone are the days when lenders would accept a credit score of 620 or finance 100 percent of the mortgage.


Record low interest rates are spurring more Canadians to refinance mortgages to consolidate debt, a trend that is expected to grow as Ottawa moves to encourage spending on housing.

While refinancing your mortgage at a lower interest rate can save you money, experts warn there are dangers to taking out bigger mortgages with home values dropping.

Laurie Campbell, executive director of Credit Canada, a non-profit credit counselling organization, said while it makes sense to pay off a credit card with a 19% interest rate with money from a higher mortgage at a rate of just 4-5%, there can be “a false sense of security.”

She said people who have a problem paying off credit cards are usually the first to repeat the mistake of getting more heavily into debt.

“We have seen it over and over again in our office,” said Campbell.

“People have great intentions and get a line of credit or a home equity loan or refinance their mortgage to get out of a scathing debt situation, only to turn around and rack up their credit cards again.”

She also said people who refinance their mortgages to consolidate debt are often taking out a bigger mortgage.


“It’s awesome,” Mrs. Rhea said. “If we sell it, we can still make money because the loan is below the appraisal.”

Refinances such as the Rheas’ account for about half of Freedom Mortgage’s business right now, Mrs. Whitehead-Parrish said.

“It’s helping us to have refinances while purchases are a little bit slower,” she said.

Refinancing also makes up most business now at American Acceptance Mortgage, said President Pat Carter. Many people who want to buy homes are waiting for rates to drop to 4 percent, she said, but that may never happen, especially now that rates have crept up to 5.1 percent from the record low of 4.96 percent a couple of weeks ago.

Ms. Carter said money for conventional loans — those not backed by the federal government — still is available for homeowners with good credit scores. Such loans carry a lower interest rate than guaranteed loans. A credit score of about 620 is the minimum to get a good interest rate, she said, along with a downpayment and prepaid interest.

Federal Housing Administration loans do not have a minimum credit score, but most banks cut applicants off below a score of 580, said Ms. McLean, who also serves as president of the Chattanooga Mortgage Bankers Association.

People with credit scores of less than 720 may have to pay additional charges called risk-based pricing, she said.

The person taking out the loan can pay extra at closing to drop those charges off the interest rate, she said.


In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again. The possible result is an endless perpetuation of the cycle of debt.

Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting your debt under control. Before you refinance, take a careful look at your financial situation and ask yourself, “How long do I plan to continue living in the house?” and “How much money will I save by refinancing?” (For more information, see “The True Economics Of Refinancing A Mortgage.”)

Again, keep in mind that refinancing generally costs between 3% and 6% of the loan’s principal. It takes years to recoup that cost with the savings generated by a lower interest rate or shorter term. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings.

It also pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance doesn’t help you achieve any of those goals.


“The Fed is trying to entice home buyers back into the market,” said Greg McBride, senior financial analyst at “It’ll take time to get buyers back into market, but it’s critical to help soak up the inventory of unsold homes.”

Despite the lower rates, mortgage applications plunged to levels not seen since November during the week ended Jan. 23, according to the Mortgage Bankers Association.

The Fed said it stands ready to purchase longer-term Treasurys if it determines that such a move will help get credit flowing once again. This may help lower the yield on the government bonds and further lower the rates because most of the rates are based on Treasurys.

But offsetting that move is the government’s massive stimulus plans, which are being paid for through massive Treasury auctions.


ARM applications accounted for only 3 percent of application volume in December, “the lowest recorded in our survey,” compared with 2004 and 2005 peaks near 36 percent, according to Freddie’s vice president and chief economist, Frank Nothaft. Of conventional, prime borrowers originally under a one-year ARM that refinanced in the third quarter of 2008, 94 percent refinanced into a conforming fixed-rate loan. About 82 percent of borrowers originally under hybrid ARMs refinanced into fixed-rate mortgages, according to Freddie’s survey.

The data, released Friday, show large premiums for initial interest rates on Treasury-indexed ARMs, a “very thin market” for one-year, Treasury-indexed ARMs, and a continued decline in ARM share of overall lending as the typical starting interest-rate savings relative to fixed-term loans evaporated, according to Freddie. “Our survey found that starting rates for conforming one-year ARMs averaged 1.76 percentage points above their fully-indexed rate, the largest rate premium observed since Freddie Mac began collecting ARM data in 1984,” Nothaft said. “Further, rates on 30-year fixed-rate mortgages had fallen to 50-year lows and were near or below initial rates on ARM products.”


The chance to refinance a mortgage at a lower interest rate is sure to get a homeowner’s attention. But it’s not always the right decision.

Having bragging rights at the neighborhood picnic isn’t a reason to refinance. Instead, it’s good to put some thought behind the timing of your decision.

Multiple refinancings can reduce your overall financial benefit. Refinancing junkies who always migrate to the next low rate pay a hefty price by leaving a trail of closing costs in their wake.

In some cases, a mortgage refinance makes sense. In other cases, it may be more prudent to stick with your current mortgage.

Before deciding whether to refinance, you need to determine what you want to accomplish. Remember, a refinance doesn’t pay off the debt; it just restructures it, often at a lower interest rate and a different loan term than the current mortgage.


When homeowners stop paying on their mortgages, they receive a notice of default from their lender, which begins the foreclosure process. Not all homes go to foreclosure, but in California, about two-thirds of homeowners who defaulted in December 2007 have since been foreclosed upon, according to Sean O’Toole of ForeclosureRadar. Foreclosures, as many residents know, tend to push down the values of surrounding homes.

The Mercury News review reveals that all but two county ZIP codes posted increases in overdue mortgages from November 2007 to November 2008. In those two — 94304 and 94305, abutting Palo Alto — there are few private homes. In a third ZIP, 95014 in Cupertino, delinquencies rose almost imperceptibly. In the other 52 ZIP codes studied, increases ranged from a tenth of a percentage point in Los Altos (94022) and Palo Alto (94306) to 7 points in East San Jose’s 95122.

While the portion of loans in the county that are overdue is still small, the growth trend is troubling, especially as a host of government programs created to help at-risk homeowners does not appear to be stemming the tide.

Condo owner Leslie Martin is still up to date on her payments, but she’s worried about becoming one of the statistics. Her ZIP code, 95126, is one of the many on the valley’s west side where delinquencies have increased significantly. Only 0.5 percent of loans were seriously late in the 95126 ZIP in November 2007, but a year later the number rose to 2.1 percent.

In May 2006, following her divorce, Martin purchased her two-bedroom condo in San Jose west of Willow Glen for $415,000, with a down payment of nearly 20 percent. Now, nearly three years later, falling property values have eroded most of her equity, her take-home pay is less after a job change, and her homeowner association dues have increased. Martin, who works as a San Jose city water-meter reader and shares custody of her 10-year-old son, said she’s been able to make ends meet by getting help from her parents, and by working part time for a valet parking company on weekends when her son is with his dad.


The financial institutions being bailed out are in trouble largely due to their appetite for high-yielding (but risky) subprime mortgages. Automakers in Detroit have been criticized for failing to stay ahead of the curve and adapt to a changing environment and create better products. The HOPE for Homeowners program lowers borrowing costs for folks who, for whatever reason, got into a mortgage situation that they couldn’t intrinsically afford.

If the federal government is prepared to take these measures, why wouldn’t it provide relief for responsible homeowners whose house purchase was ill-timed?

I think I know the answer. The devil is in the details. Investors are gun-shy of mortgage-backed securities. It would make sense that they would not have an interest in investing in mortgage loans without an evaluation of the collateral, despite the borrowers’ stellar credit and income.

On the other hand, the Fed seems to be throwing its weight in all directions. Perhaps it should consider using some of its $700 billion in relief funds to guarantee the loans of credit-worthy borrowers to investors. One thing that I have observed in my 20-year career is that the vast majority of folks with excellent credit maintain their credit rating over time.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (, he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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