Mortgage Refinancing Becoming More Difficult, Expensive

The Wall Street Journal reports via the Spokesman-Review that with rates on many homeowners’ adjustable-rate mortgages rising, many Americans who would like to refinance into a new home loan are finding they can’t.

In some cases, that is because of a prepayment penalty, which would force them to come up with thousands of dollars if they sign up for a mortgage refinance in the first few years.

Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a lower, initial interest rate (or teaser rate) that rises sharply after an introductory period.

Other borrowers are getting caught short by a changing housing market — one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making home mortgages easier and easier to get.

The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are still able to qualify for mortgage refinancing but are finding it more costly than they expected.

These challenges come at a time when borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages.

Penalties assessed on mortgage prepayments are most common with option ARMs and loans made to borrowers with scuffed credit. Some 84 percent of option ARM loans made last year carried a prepayment penalty, according to studies that examine mortgages packaged into securities and sold to investors.

The challenges facing borrowers are becoming more apparent at a time when opportunities for refinancing are narrowing. Conventional 30-year, fixed-rate mortgage loan costs dropped to their lowest levels in 14 months in December, but have recently drifted higher.

Rates on 30-year fixed-rate home loans currently average 6.45 percent.

“The best deals in going from an ARM to a fixed-rate are passing,” says Doug Duncan, chief economist at the Mortgage Bankers Association. “If anything, rates are likely to move up rather than down.”

There are signs that some lenders are beginning to tighten their bad credit mortgage standards. The shift comes after a long period of liberal lending practices that made it easy for borrowers to finance 100 percent of a home’s value or get a mortgage without documenting their income and assets.

SOURCE: The Spokesman-Review