Why you're stuck with your mortgage

If you're not confronting interest-rate reality, you may have trouble refinancing.

By MSN Real Estate partner Mar 14, 2014 11:23AM

© Jose Luis Pelaez, Inc./Blend Images/CorbisBy Jeff Brown, MainStreet

 

It's a common rationalization: "I'll get the best mortgage I can now and refinance later if things change." A few years down the road, mortgage rates might be lower, or you might want to take some cash out of your home for something else. Refinancing can be a second bite of the apple.

 

But don't count on it. Homeowners who think refinancing will be a breeze often find the doors slammed in their faces. The mortgage you get today may be the one you're stuck with.

 

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Despite historically low mortgage rates in the past few years, about half of mortgage holders have not refinanced, staying with older loans that cost more — typically 6 percent or more when a refinancing could have cut the rate to below 4 percent, according to a survey by Fannie Mae.

The mortgage-backing company recently polled 1,327 homeowners with mortgages to find out why so many had not refinanced. Among the reasons cited by borrowers most often: not being able to reduce payments enough, feeling that closing costs were too high and not wanting to commit to additional years of payments.

 

Many homeowners reported they had been rejected for refinancing. Many simply did not qualify for refinancing even though they obviously had qualified for a mortgage before. Even though a new loan at a lower rate should have a lower payment, making qualifying easier, the borrower's credit rating may have slipped, or one spouse's job loss would reduce the household income below what was required.

The homeowners who had not refinanced tended to be first-time homeowners and younger than others, and they had lower incomes and less education than those who had refinanced. Many cited the costs of refinancing as a serious obstacle. And some said they were underwater — owing more than their homes were worth after the housing collapse — and could not come up with enough cash to pay off their existing mortgages.

 

The study found that homeowners are unlikely to refinance during the first six years in the home, and that the "prime time" for refinancing is from years six to 15.

 

Bottom line: Get a mortgage only if you can live with it for the duration. Don't count on getting a lower rate later — especially as rates are more likely to go up than down over the next few years.

And don't assume you'll be able to take cash out of your home. Even if rates are appealing some years from now, qualifying for a loan is never guaranteed. And you can't be sure the home will appreciate enough to provide much equity, or value in excess of any loan balance. Building equity the other way, by trimming the balance through regular payments, is a slow process.

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Tags: loans
 
18Comments
Mar 17, 2014 2:05PM
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The main problem with the current home loan business is the simple fact that the only ones with substantial investment risk is the lender. The only way to insure banks and lenders won't get stuck again with abandon loans is to require a minimum 20% non-borrowed down payment. Don't forget the BUYER is coming to the lender asking the lender to risk their money, not on the property, BUT ON THE BORROWER who is promising to make payments. Banks don't want the property, they want the agreed payment each month for the specified period of time. Until we get back to requiring that buyers have a substantial invested interest in the homes they're purchasing, nothing will ever change and buyers will continue to stiff the banking industry.
Mar 17, 2014 10:50AM
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Lower than expected buyer traffic, hmmmmmm?  Thanks Obama.  Glad mine is mortgage free, paid off.
Mar 17, 2014 9:25AM
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Simple.  Keep your mortgage and work like crazy to pay it off early.  Many of us have done just that instead of mortgage jumping.
Mar 17, 2014 4:42AM
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   In the end you are never stuck with anything other than yourself. You can play the hand you have or just walk away from the table. The housing problem will soon collide with the student debt problem since many student loans have a mortgage size payment. The result will be a lot less homeowners, another recession and a government bail out once again. Just wait and see the 2008 recession look like a vacation next to the one that is heading our way.
Mar 17, 2014 4:04AM
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Common sense should tell you that if you have an income loss, or you've made some relatively recent delinquent payments, or had a repossession, your chances of refinancing are one of two...slim and none. Many just walk away from these higher interest loans ( loans they agreed to) thinking they'll start over with another cheaper home and  leave banks holding the bad debt. Obama and his crew are getting close to departing, so that option may not be around much longer. Buying a home use to be the biggest financial commitment a middle class family made, it took preparation and serious effort. Loans weren't taken lightly by the buyer or the lender. We need to get back to that mentality once again. Everyone should not be home owners.
Mar 17, 2014 3:56AM
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The old rules that worked don't apply anymore?  Who do we thank for that?  Wall Street, The President and crooks in office.  Thank you!
Mar 17, 2014 3:51AM
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Not all "bankers" are untrustworthy!

Just because you may have gotten stiffed by a LARGE commercial bank doesn't mean that the smaller community banks are just as bad. They are the way to go. Smaller banks don't get bought out and change their name 3 times in 5 years and they are in YOUR community, so they care. As long as you can quality they will help you to reach your goal of being a homeowner ( or a refi )

Mar 16, 2014 2:13AM
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Another BS article. It's a debt. You tackle debt with a budget. You refinance, you start over with the highest ratio of interest and any fees paid first. Do the math, unless there is a distinctive reason, just accelerate what you can afford to while keeping on living. NEVER trust a banker, get advice from ANYONE else.
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