Traditional Financing Returns: Owners Who Win Refinance Will be Able to Afford It

How can it be a good thing that some prospective homebuyers and current owners are having a difficult time obtaining a loan or refinancing an existing loan? Because, unlike a short while ago, those who do wind up with a loan most likely will be able to afford it.

True, even for some perfectly qualified borrowers it is still too difficult or impossible to obtain a loan, but the rules that are emerging from the financial meltdown and the excesses of past years look more an more like what used to be known as “traditional financing.”

At the end of the day, the financial system may return to the age-old attitude of housing as shelter, pure and simple, and not an investment.

Whether that will be true in Southern California, where typically there is greater demand for housing than supply, remains to be seen.

While Southern California home prices may soon enough resume a steady single-digit advance once the current woes are resolved, it seems a safe bet that double-digit increases in resale prices are gone for a long while, if not forever.

Still, it came as no surprise that phone lines at mortgage brokers' offices lighted up as thousands of people have tried to join the latest refinance boom, a boom created by interest rates below 5 percent.

But of the thousands who applied, most likely relatively few will actually walk away with a refinanced loan.

Even those with exceptional credit, strong income, job security and considerable equity in their home are finding it difficult to refinance.

Why?

While impossible underwriting often is the culprit, in too many instances the value of a home had declined well below the original purchase price to a point where the numbers simply do not warrant a refinance.

Still, that should not dissuade owners from seeking a refinance, especially if an analysis shows that a new loan will greatly reduce their monthly mortgage payment.

For the few who are lucky enough to qualify for a loan, refinancing can save thousands of dollars a year in mortgage payments. In many instances, however, owners would see little if any benefit at the end of the day even if they qualified. So how does a homeowner know when it's most beneficial to refinance?

It's impossible to provide a formula that works for everyone, simply because there are too many variables.

The first mistake that many people make is to focus primarily on the interest rate.

Instead, shift attention to the potential savings. Trimming the interest rate by one or two points in some instances does not necessarily cut the monthly tab. B egin by dividing the total cost of the loan by the potential monthly savings from refinancing.

The resulting number is the break-even point — the number of months it will take before the refinanced loan pays off. If a move is likely within that time frame, forget about refinancing.

With that basic number in hand, everything else grows more complicated and less certain. For example, if the loan is for more than 80 percent of the home's value, get ready to pay a costly mortgage-insurance premium. That in itself may make refinancing impractical. Less tangible factors then come into play: the borrower's credit score, the particular lender's qualifying rules, closing costs, the interest rate and how it compares to what other lenders are offering.

The saddest fact of today's market is that the owners who need and would benefit most from a refi simply do not qualify. They have little or no equity in their home due to falling resale values.

Even those with considerable equity and everything else in perfect alignment need to brace for a difficult time getting a refi or new loan.

The Southland Regional Association of Realtors is a local trade serving the San Fernando and Santa Clarita valleys. SRAR is one of the largest local associations in the nation.