First the answer to your question…..
Question: Should I refinance?
Answer: Sure.
It is without a doubt the question I am asked the most these days. I have been so lazy with these articles and my blog in general, so I want to lead with this because I answer this question again and again and even though every situation is different, the conversations are so often the same.
Today is December 29, 2008, which means this will only be posted for a few days, so you should feel free to visit the blog at www.plugandplague.com which will have it in relative terms, forever. I have to get something out because I am spending an inordinate amount of time answering the above question over and over so more people than are asking must be wondering. Posting this out there in the nebulous world of interwebland might lead to someone getting their hands on something that helps them understand what’s at stake, and lead to an internal answer of what to do next.
Plus, it is a little bit of venting for me.
The question of whether to refinance is on everyone’s minds. To borrow a phrase I have been responding to people with, the answer is that in many cases, the answer is yes, but it is much less a “should I?” question than it is a “can I?” question.
Without beating a dead-horse, it is true that lending restrictions are harder. Of course they are harder. This is the converse energy of the over-permissive lending mindset that permeated the industry before-hand. And let’s please stop laying it all at the doors of the sub-prime lending industry. It’s all the same industry you moronic talking heads! The reason all banks are suffering is explained in the next column, but the short answer is that they all played, so they all got burned.
This is an across-the-board, spend-as-you-please culture that today reaps what it has sown. Businesses, households, governments and organizations of all types learned to live beyond their means through the use and misuse of credit. Deficit spending has been the operating mode of those that consider themselves “fiscally conservative” so let’s call it what it is….the chickens coming home to roost.
Getting back to the question, should you refinance?
Yes, if you can, you might very well should.
Rates are in fact at the lowest level of the past 50 years. That is a fact.
It is also a fact that this is the basic scenario for the described best rate:
1. A loan amount that represents no more than 80% of the house’s PRESENT value.
2. No additional monies taken out, loans paid off or consolidated, otherwise, the total loan amount must now represent no more than 70% of the house’s PRESENT value.
3. No additional liens on property.
4. Credit scores indicating a middle score (out of three) of all borrowers of 740 or better.
5. Debt-to-income ratios not to exceed 38% including monthly obligations and housing costs.
6. Assets to be sufficient to cover any needed closing costs, the set up of new escrow accounts, and reserves leftover to pay all monthly costs for at least 6 months.
There are actually more conditions, but if we can get through the first 6, we are golden and can probably handle the rest. So for now, let’s not even worry about things like unexpected escrow requirements for future property tax bills that will be administered and controlled by the closing title company…that sort of thing.
Instead let’s start with the top of the list. The real mystery in this market is what is your home worth today? On a national average, about 15% less than it was this month last year. I won’t bore you with why that is a happy-face number, but it is also a national number, so it isn’t necessarily that bad everywhere. The highest to rise had the furthest to fall, so they propel those numbers more and exaggerate the final tally, but the news is not good pretty much everywhere, and what gets lost in the numbers is the volume.
Volume is the essential ingredient, not price. Prices might fall ten, fifteen or twenty percent from the time a person bought a home recently, but even at the right price, buyers have an over-abundance of supply, and that causes more and more foreclosures, short sales, and the like, and all of those numbers count too. It is folly to think they are talking about everyone around you, but not yourself when you start talking about the value of homes.
People are still not aware of the facts because they don’t get a statement like they do with their other assets that gives its current value and potential loss in value. Just as people don’t like to hear about other investments going south, no one wants to see the result in their home value either. This is an ugly cycle, but at the risk of being overly depressing, at least it isn’t as bad as the stock market, which has lost 35% of its year-to-year value, far worse than the price drop in real estate over a similar period, but not receiving nearly the equivalent attention.
It’s okay. I want you to understand that the down tone of this column is necessary. And the next one after this will make this column seem bright in comparison. Sorry. It is necessary.
Don’t worry though….the one AFTER the next one will describe how to fix the problem. All of it.
But back to the refinance issue.
The real issue is this. Yes…rates are low. Yes…there are lenders lending, but only in circumstances that mean they risk nothing and make money, which means that for those folks that can reliably fall within the guidelines, the streets are paved with gold.
To find out, it costs you the price of an appraisal. Previous values mean nothing.
Banks now make us chose off of a pre-approved list, so you sort of need to know what lender you plan to work with, to make sure you work with someone off of their list. Oddly, you need to get the appraisal back before you lock most loans for fear the lock will be invalidated if you don’t meet the value requirements, so the lender that is priced the best at the time you order the appraisal, might be priced poorly when you get it back.
It happens.
All manner of nonsense happens now. To say that the $700 billion bailout has failed to work is a massive understatement since EVERY person in the industry will agree that the landslide on lending difficulty has gotten worse and worse without let-up. They don’t do it by folding their tent and not taking loans, but by risk assessment and general risk aversion. Again, they do the loans that make them money and offer the lowest amount of risk, which are sad to say, very few.
So….should you refinance…..probably.
Can you? I don’t know. It should cost about $300 to find out.
I realize the financial cost is only part of the issue, and it is always easy for me to do the metrics for someone, (i.e. – what it ACTUALLY costs to refinance, how much you save a month, what impact starting over with your interest payments means, etc. )
The best way to start is with a reliable appraisal because it is the document that says you can or you can’t move forward from here, and if so, here’s how.
The other factor is harder to quantify….just as people don’t want to open their 401K statements to see how bad it is, a lot of people don’t want to know their present home value. I can certainly understand that, so perhaps that’s the question that needs to be asked first. If you can stomach whatever answer you get, again is, it costs $300 to find out.
Next column will answer some of the questions this one presented, namely, how in the hell did we get here. Following that will be how to get out of here. My own perfect plan ladies and gentleman.
Sorry for my dreary tone. But for me, this has become a very dreary business. I have never been busier, and never had less business. As unfair as it seems to have to have this conversation via article/blog, it is the same one I have every day, multiple times a day, and I want to get it out there.
More soon, and best wishes to all of us for a much better 2009.
Lee Diamond
lee@bigshouldersrealty.com
773-255-6347
