Falling home values make refinancing tough

Reeve and Corinne McNamara got a conventional 30-year mortgage with a 6 percent interest rate when they bought their Marietta home five years ago, and they put more than $5,000 down.

So when mortgage rates recently dipped below 4 percent, the McNamaras figured they could cut their loan term and save a lot of interest expense by refinancing to a 15-year note. With jobs and excellent credit scores, the couple seemed textbook candidates for refinancing.

The good news for the McNamaras ended there. They were denied a new mortgage because the value of their home -- $270,000 when they bought it -- had dropped to $232,090, according to Cobb County, or less than they wanted to borrow. A private appraisal came in at $222,000 last month.

“Even the money we put into the house when we bought it is gone now,” Reeve McNamara said. “We couldn’t believe it.”

As their experience attests, record-low mortgage rates have turned out to be a tantalizing mirage for some homeowners. Others have had to use a federal program to pull off a refinancing, or faced a gauntlet of tighter qualifying requirements used by traditional lenders.

Since 2005, home values in Cobb County have fallen around 20 percent, according to the Zillow.com’s Home Value Index, which uses uses public records, sales and other neighborhood factors to estimate values. Other core metro Atlanta counties have seen similar declines, with values down nearly 24 percent in Fulton, 22 percent in Gwinnett and 21 percent in DeKalb over the past five years.

Such declines, along with other factors, have kept many homeowners from refinancing, said Jeff Dailey, Duluth branch manager for the New jersey-based Real Estate Mortgage Network.

“I think traditional banks are busy with refi applications, but our refi volume is not what we’d expect, for interest rates to be so low,” he said.

While many financial institutions don’t publish the number of mortgage applications they get, LendingTree.com produces an index that shows refinancing applications doubled nationally since April and continue to rise. Applications in Atlanta spiked as well but began falling in the past few weeks, according to the index.

“I think we will soon see this same thing happening across the country,” said Cameron Findlay, chief economist for LendingTree.com.

Traditionally when interest rates go down, homeowners who have mortgages can take advantage by applying for a new mortgage. If they refinance at the same term they can cut monthly payments. If they cut the term, they may pay about the same or more monthly but pay off the loan faster and can save tens of thousands in interest costs.

Refinancing is different from a mortgage modification, however. A modification is typically for homeowners who are in distress or cannot qualify for a refinancing. And some homeowners are being encouraged to try mortgage modifications rather than refinancing because their mortgage is more than the home is currently worth.

In the current environment, non-distressed homeowners who want to refinance need good credit, a steady income and 3 to 5 percent equity in the home at its current value, Dailey said.

The latter makes it tough for people who bought in the last few years, as many put little or nothing down on home purchases, he added.

“But things have gotten tougher for even the well qualified,” he said. “The income documentation required has gotten to be so much. We actually have to over-document now because so many investors have been burned in the past.”

Mortgage-seekers typically have to provide proof of income in the form of pay stubs, W-2s and tax returns for the prior two years. Dailey said his office spends considerable time verifying income, checking it against tax records and making sure other properties you may own don’t take too much.

“Even if you own another home free and clear there are expenses tied to that property,” he said. “Now we have to consider all of that, when before that might not have been considered at all.”

One refinancing option for homeowners with little or no equity is the federal Making Home Affordable Program. The Home Affordable Refinance Program (HARP) has opportunities for homeowners who:

-- Have loans owned or guaranteed by Fannie Mae or Freddie Mac (if you are unsure, ask your loan servicer)

-- Are the owner/occupant of the home

-- Have a first mortgage that doesn’t exceed 125 percent of the home’s value

-- The homeowner is current on payments and haven’t been more than 30 days late in the past 12 months

“HARP has enabled a lot of people to be able to refinance,” said Charlie Gerding, a regional vice president at Wells Fargo. The refinanced loans are not based on appraisals and the program gives homeowners a chance to improve the long-term affordability of their loan, he said.

Lorenzo Falgiano, who lives in Grayson, said he was only able to refinance under HARP.

“I looked at doing it though my credit union, but we would have had to pay off our equity line of credit, and somewhere around $8,000 in closing fees,” he said. “And that was if our home appraised were we needed it to, and it probably wouldn’t have.”

His home appraised five years ago at $425,000, he said, but the latest tax bill from Gwinnett County listed the value at $320,000.

“We’re still in the middle of the process, but all indications are things are going well,” he said. If the refinancing goes through he expects to shave almost two points off the interest rate and cut the payment by close to $750 a month.

The Falgianos will use some of the extra money to further their 14-year-old son’s passion for baseball.

“He’s on a travel team, and that can get expensive for parents,” Falgiano said. “So sure, we’ll put that saved money to good use in that regard.”

Homeowners who want to refinance should be prepared to shop around, explore different options and ask -- and be asked -- a lot of questions, said Therese Upshaw, a senior loan consultant for Atlanta-based Georgia Platinum Mortgage.

“There are still options out there for a lot of people,” she said. “Yes, people are missing the equity piece, but that doesn’t mean you’re out of the ballgame. You’ve got to call your mortgage people or your loan servicer to find out what they can do for you.”

homeowners with little or no equity is the federal Making Home Affordable Program. The Home Affordable Refinance Program (HARP) has opportunities for homeowners who: