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Refinances Hit a Roadblock

refinanceLow mortgage rates do not appear to be enough of an incentive to attract homeowners to refinance their homes.

The total number of loans refinanced through the Home Affordable Refinance Program (HARP) fell in February as mortgage rates remained under 4 percent over the last three months.

According to the Federal Housing Finance Agency (FHFA) February 2016 Refinance Report, borrowers completed 6,424 refinances through HARP, bringing total refinances from the inception of the program to 3,393,217.  In addition, HARP volume accounted for 5 percent of total refinance volume, where it has remained for quite some time.

The report showed that mortgage rates also decreased in February, with the average interest rate on a 30‐year fixed rate mortgage declining to 3.66 percent from 3.87 percent in January.​

Borrowers with loan‐to‐value ratios greater than 105 percent accounted for 23 percent of the volume of HARP loans, the FHFA reported. A total of 25 percent of HARP refinances for underwater borrowers were for shorter‐term 15‐ and 20‐year mortgages, which build equity faster than traditional 30‐year mortgages. HARP refinances represented 10 or more percent of total refinances in Florida and Georgia, double the 5 percent of total refinances nationwide over the same period.

In January, Black Knight Financial Services' (BKFS) Data and Analytics division reported in their Mortgage Monitor Report that as of November 2015, approximately 5.2 million borrowers could likely both qualify for and benefit from refinancing at today’s interest rates.

Although the number of refinancers may appear to be large, it is actually down from over 7 million in April 2015. Black Knight reports that interest rates were under 3.70 percent during this time, and the 20-year rate was 3.96.

Black Knight Data & Analytics SVP Ben Graboske explained, “This population is diminishing, and as mortgage interest rates rise, it will only continue to shrink further.”

Recent analysis of Black Knight's data by NerdWallet found that the 1 percent rule in the housing market is changing among refinancers.

Previously, homeowners typically refinanced if they could get a new rate at least 1-2 percent, or 100-200 basis points, lower than their original interest rate. However, many borrowers could still see a lot of savings on their mortgage payment by refinancing at an interest rate difference of 75 basis points, or less than 1 percent, including closing costs.

So why are homeowners so hesitant to refinance in today's low interest rate environment?

NerdWallet found that homeowners run into the following roadblocks when considering refinancing:

  • Lower credit scores and income. Homeowners whose credit or income have deteriorated since they took out their mortgage may not be able to qualify for today’s lower rates. (The Black Knight study looked only at people with over 20 percent equity in their homes and credit scores over 720.)
  • Hassle and upfront expense. Many lenders will make homeowners seeking a refinance jump through a lot of hoops, including mountains of paperwork. The credit score site MyFico.com estimates that a $200,000 refinance comes with $5,600 in closing costs.
  • Not enough equity. The U.S. median home price still hasn’t topped what it was at its high point in 2006, before the Great Recession. Lenders generally won’t consider applications to refinance from those who don’t have at least 20 percent equity in their property. Homeowners who took out second mortgages and used up their equity may find that they cannot qualify to refinance.
  • Inconsistent job history. To get the best rates, lenders favor applicants who show a stable job for at least the past few years.
  • Lack of assets. Lenders like to see cash and other assets available to pay the mortgage in case you lose your job. If you’re living paycheck to paycheck and have high credit card balances, chances are you won’t be able to get a lower rate or, in some cases, even qualify for refinancing.

Click here to view NerdWallet's complete study.

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