I’m thinking of refinancing my mortgage, but I heard that rates are going down to 4.5% soon. Should I wait?

This is a question I’ve been getting a lot lately. This was a leak from Treasury Secretary Paulson’s office a few weeks ago about a program they were supposedly  looking at. This program would apply to purchases only, so it wouldn’t effect refinance rates, but even for purchases this is more of a random idea rather than a well thought out plan. The President-elect’s team said they were not involved in any planning, so the chances of this actually coming out appear to be slim.

The thinking behind this goes something like this. In order to get the economy moving again, the real estate market needs to stabilize. If mortgage rates are low enough, more home buyers would be willing to buy homes. This makes sense, but the details are the problem. The government doesn’t control mortgage rates. Mortgage rates move up and down based on activity in the mortgage backed securities market. Traders buy and sell these mortgage bonds in order to hedge their own contracts and as a way of anticipating where rates will be in the future. In order to get rates to 4.5%, the Treasury would have to buy down the rate, the equivalent of paying points, and it would cost a tremendous amount to get the rates down. It then comes down to bang for the buck. Is this the best use of government money, to subsidize the rates for a small slice of home buyers, when there are so many other needs? My guess is that this plan is already dead on arrival.

The bigger question is will mortgage rates get down to 4.5% on their own? And the answer to this is, maybe, but no one knows. Mortgage bonds and mortgage rates typically move based on economic news and the prospects of inflation and the over all strength of the economy. To put it simply, bad news is good news for mortgage rates. Lord knows we’ve had plenty of bad news lately. But the situation has grown more complicated in the last year. Many large investors that used to buy mortgage backed securities have stayed on the sidelines staying away from anything that could be a risk. The spread between long term and short term securities is at a record high, as is the spread between mortgage bonds and treasury bonds. Rates could fall further, but the last two times that rates dropped, they bounced back up after a short time. The old saying is that a bird in the hand is worth two in the bush. If refinancing now would help your situation, it makes sense to take advantage of the opportunity now. If they drop lower later, you can always refinance again (especially if you do a no cost refinance, and don’t have to pay extra cash).

Can I refinance my first mortgage to a lower rate if I also have an existing second mortgage?

Yes, but it might not be as easy as it used to be. Whenever you have a second mortgage or home equity loan, we will need to get a subordination agreement from the lender. A subordination agreement says that the lender with the second mortgage will keep their lien in the second position, and not try and jump in front of the new first mortgage when the old loan is paid off. This has always been standard procedure with refinances, and it used to be an automatic that the second mortgage lender would grant the subordination. The lender would usually need to know the terms of the new first mortgage along with a copy of the new appraisal and title and often a check for $50 or $100 for their efforts. Some lenders were faster than others, but it was rare that a second mortgage holder would not allow the new refinance.

This has changed somewhat in the last year. With property values down in many areas, second mortgages and equity lines that looked safe before are now considered risky. If the homeowners are not able to make their payments, and the property has to be foreclosed, the first one to lose will be the second mortgage holder. This is a big problem with loans that were taken out in the last several years. When home values were climbing, second mortgage lenders got more aggressive, and it was common for them to make loans up to 100% of the home’s value. Now, these loans are under water, the property isn’t worth as much as the loans on the home. This means big losses for the companies that make home equity and second mortgages. As a result, many banks have stopped making these loans entirely, or have tightened their guidelines so that they will only make these loans if the home has a lot of extra equity.

Now, when these lenders get a request for a subordination agreement, they are not so anxious to grant it. Some lenders have stopped granting them entirely, but most are looking at the specific situation and seeing if the new loan will put them in a better position, or not. In order to get the subordination you will need to have a good cushion of equity. If you are thinking about refinancing and have a second mortgage or home equity line, this is one thing you or your loan officer will need to check on right away.

If I change jobs, will that hurt my chances of qualifying for a mortgage?

No, it shouldn’t make a difference if you are still in the same line of work and your income will be the same or better. There are a few things to keep in mind if you are going to change jobs, though. With some jobs you start out on a probationary period and are considered a temporary worker. If this is the case and the employment verification shows you are temporary, it will be a problem. Another thing to consider is how will you be paid? If you are paid by a salary and your income is the same from paycheck to paycheck, no problem. But if a big part of your income comes from overtime, bonus or commissions, and these aren’t guaranteed, this could be an issue.

If you plan to buy a new home in the near future and you are thinking of changing jobs, run the information by your loan officer beforehand, just to make sure this won’t hurt your chances of being approved for a mortgage.

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