Lower Home Values Are Killing the Refinancing Industry

By Sheryl Landrum
Calculators for Mortgages Columnist

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While property markets in the US overall have been relatively flat, some areas have seen precipitous drops in real estate values, sharp increases in the number of troubled mortgages, and extreme tightening of mortgage lending. And these factors push values even further down. What can homeowners do?What's Happening with Today's Mortgage Refinancing?
In today's market there multiple restrictions on homeowners who wish to refinance their mortgages:  

• Underwriting guidelines for new mortgage loans and refinances have tightened. Try FHA for refinancing at high loan-to-values. High loan-to-value ratios on conventional mortgages are becoming a thing of the past. If you can't refinance with an FHA you will probably need substantial home equity to close the deal. In addition, many lenders are dropping their home equity lines of credit and home equity loans. In this market trying to extract more than 80% of the equity in your home will be tough--and will probably cost you extra fees, higher interest rates, or added points.
• Declining property values are making it difficult to refinance mortgages. You may have to bring in some cash to close on a refinance. Although many lenders are dropping the 5-10% loan-to-value reduction for homes in "declining market areas," many borrowers are finding that they do not have the equity for a home refinance. For example, a mortgage calculator shows that a home purchased for $700,000 with a 20% down payment gets you a mortgage of $560,000. In many parts of California and the rest of the nation, home prices are down about 25%. So if you bought that $700,000 home a couple of years ago it might be worth only 75% of its purchase price, or $525,000, today. How can you refinance a mortgage of $560,000 when the collateral is only worth $525,000?
• Lenders are also pulling home equity lines. If you have cash available on your home equity line, you may want to draw it down now. If you have a line of credit or a home equity loan and your home value is declining, you may get a letter from your lender stating your credit line has been frozen. The line is still in place and you are still responsible for payments on it; however, you will no longer be able to draw available cash from it.

What Does the Future Hold for Home Mortgages?
Home devaluations, like interest rate variations and inflationary pressures, are cyclic and this too shall pass. Talk to your lender about fixing interest rates on volatile adjustable rate mortgages. Look into fixing home equity lines as well. And keep an eye out for solid investments--with lower prices and interest rates today is a great time to be a buyer.



About the Author
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.