Refinance Now, If You Can

April 13, 2010 — -- Douglas Hibbard would love to get his old Mississippi home off his hands. He had no luck two years ago, when he left Horn Lake, Miss., for a new job as a pastor of a church in Monticello, Ark. He tried to sell the house but no one was buying, so he rented it out instead.

Now Hibbard is facing a monthly mortgage payment that will soon head north of $1,000, thanks to rising insurance costs and a tax bill that's grown because Hibbard no longer qualifies for a homestead tax exemption.

With no prospective buyers on the horizon, Hibbard, 33, is looking at a money-saving strategy: to refinance his mortgage to a lower interest rate.

"Even at 6.75 or 6.5 percent -- even that would help," he said.

Average rates on 30-year fixed-rate mortgages jumped from 5.04 percent to 5.31 percent last week, according to the Mortgage Bankers Association.

But some say that, despite the increase, homeowners who don't plan on selling their homes soon should still consider refinancing now, before rates rise even higher.

The MBA predicts that by the end of the year, the average rate on a 30-year mortgage will rise to 5.8 percent. By 2011, according to the association, the rate will hit at least 6 percent.

MBA Vice President of Research Mike Fratantoni and others say that last month's end to the Federal Reserve's mortgage-buying program is the main factor behind the recent rate increase, while Greg McBride, a senior financial analyst at Bankrate.com, cites the improving economy.

"When the economy improves, investors start to look for a better return on their money," McBride said. "They're usually going to find that better return in other asset classes like stocks, so (mortgage-backed) bonds have to pay higher rates just to keep investors from fleeing for other asset classes."

Both men agree that even higher rates are on the horizon, because of improvement in the economy and anticipated increases in interest rates on government debt (which can force hikes in other interest rates, including mortgage rates.)

"The opportunity that exists now is the ability to lock in fixed mortgage rates that are still pretty close to record lows and that's not an opportunity that's going to hang around forever," McBride said.

Homeowners Believe They 'Missed the Boat'

McBride said it's an especially good time to refinance for people with adjustable-rate mortgages, although some may find their new, fixed rates higher than their current rates.

"You may be trading away a 3.5 percent rate to lock in at 5 percent, but in doing so, you're trading away a loan that could be at 6.5 or 7 percent in a few years," he said. "Refinancing pays for itself through the predictability of having a mortgage payment that will never change."

Illinois mortgage broker Bradley Eggers said customers seeking refinacing is down to just "a slow trickle" compared to when rates were lower several months ago. He is spreading the word about refinancing opportunities through messages on the microblogging site, Twitter.

"For anyone who hasn't yet refinanced and is still sitting at 5 and three-quarters or 6 percent rate, it's a great time to refinance," said Eggers, a senior loan originator with Ardain Mortgage in Palatine, Ill. "We just don't want people to wait until the last minute and then not be able to refinance because it won't make sense for them anymore."

The national statistics on refinancing reflect Eggers' experience. According to MBA data, refinancing applications earlier this month were down to their lowest level since late August 2009.

MBA's Fratantoni attributes the decline to the recent rise in mortgage rates.

"Those tend to track each other pretty closely," he said.

"When rates move, either people jump off the fence and get the deal done before rates go higher or they say, 'Forget it, I guess I missed the boat,'" said Bankrate.com's McBride. Lately, he said, the "missed the boat" mindset seems to have been more prevalent.

Obstacles to Refinancing

Brokers like Evan Kalin say many homeowners would like to refinance and simply can't, due either to a job loss, bad credit or being underwater on their mortgages -- owing more on their homes than they're worth.

Kalin, the president of Home Capital Mortgage Corp. in the Bronx, N.Y., said that for every 10 homeowners who come to him for refinancing, eight end up being rejected by banks.

"The people that really need to refinance are the people that really can't get them," he said.

Government Help for Refinancing

Those who are underwater may find help through the government's Home Affordable Refinance Program (HARP), which offers refinancing for loans guaranteed by Fannie Mae or Freddie Mac, including some underwater mortgages.

Homeowners may qualify for the program if what they owe does not exceed 125 percent of the market value of their homes.

But HARP is no cure-all: Homeowners must be current on their mortgage payments and must have a "reasonable ability to pay the new mortgage payments" -- in other words, have a job.

The "ability to pay" requirement is also a sticking point for banks considering refi applications, and that could prove a problem for Hibbard.

Though he is a full-time pastor, he said he's worried he'll have trouble refinancing because his income isn't exactly stable -- like his surrounding community, Hibbard's church has fallen on tough times and Hibbard himself might face a salary cut.

He'll check out his refinancing prospects anyway, he said.

Right now, he said, "any option is worth looking at."