NEW YORK (MainStreet) — By now most homeowners know that the refinance ship has sailed. Or has it?
For those whose circumstances have recently changed there may still be a chance to get a better mortgage deal. A homeowner whose credit score has improved, for instance, might now be able to get a low enough rate to make the refinance arithmetic work, as could one whose income has risen significantly or one who has given up self-employment to work for a stable firm.
Refinancing was big business in recent years, as homeowners took out new mortgages to pay off older ones charging higher rates. In fact, refinance business kept mortgage lenders afloat in the years the housing market was in the dumps. But a rise in rates over the past year or so has taken the profit out of refinancing, as a new loan probably won't save you enough to offset the costs of getting it. Indeed, it may not save you anything.
But that assumes an apples-to-apples situation, which may not be the case.
Credit scores are based on the individual's history, the most important factors being the track record of paying bills on time. A good history in the past year or 18 months can help overcome the damage from late payments or defaults further back, allowing the applicant to get a lower mortgage rate.
On his website, TheMortgageProfessor.com, Jack M. Guttentag, emeritus professor of finance at the Wharton School, says a person with a good credit history can raise a score from 620 to 660 in 18 months. That could induce a lender to reduce the applicant's mortgage rate by about 0.375 percentage points, from 4.625% to 4.25%, for example. If the homeowner had an older mortgage charging 5% or 5.25%, this extra saving from an improved credit score might be enough to tip the balance and make refinancing pay. That would be more likely, of course, if the homeowner expected to have the new loan for many years, allowing the monthly savings to offset the various refinancing fees.
A homeowner who had been able to save some money might also tip the balance by paying points, which are upfront interest charges that result in a lower overall rate. Again, the longer you will have the mortgage, the more likely this move will pay off.
People who have experienced a significant increase in income might also get a better deal on a new mortgage than they did on the old one. That's because their payment would now represent a lower percentage of their income. Lenders like that because homeowners who are not up to their ears in debt are less likely to fall behind in payments.
Newfound wealth would also enable a homeowner to pay off a chunk of principal during a refinancing. The new loan payment would then be smaller related to income, encouraging the lender to offer a lower rate. A bigger income could also allow you to get a low-rate 15-year mortgage to pay off a 30-year loan charging more.
Not many people have experienced skyrocketing wage gains, but many people do experience a surge in household income when they get married or a spouse goes back to work.
In recent years it's been difficult for the typical self-employed person to get a mortgage, and those who did often paid higher rates because they were deemed risky borrowers. So if you've gone from being your own boss to working for someone else, see if you can get a better rate. You might need a year or two in the new job to earn a lower offer on a mortgage, but there's no reason to suffer with a pricy loan any longer than necessary.
It's true: Fewer and fewer homeowners can profit from refinancing. But that doesn't mean everyone. Before abandoning the idea, assess the changes in your finances, and then check with a few lenders. If you can find one that will offer a low rate and minimal fees, the refinancing math might just work.
--Written by Jeff Brown for MainStreet