3 reasons refinancing may soon be easier

June 12th, 2012

Refinancing remains a challenge for many homeowners with underwater mortgages, but recent developments carry a few new reasons to keep the hope of refinancing alive.

Here are three recent developments that could extend the opportunity to refinance to more homeowners:

  1. Housing data suggests the market may be firming up. For homeowners with underwater mortgages, home prices are a key to achieving refinancing. While prices themselves remain weak, some of the underlying fundamentals suggest the market may be due to firm up. According to the U.S. Department of Housing and Urban Development, both new and existing home sales were up in April compared to a year earlier, and the percentage of total home sales considered distressed sales has dropped to 29 percent, from 35 percent a year earlier.
  2. Mortgage rates continue to find new lows. Mortgage rates once again reached new lows in early May, but the important thing is not so much whether rates drift a few basis points lower or higher. What matters is that rates have settled into these low levels for a long time now, giving more homeowners with underwater mortgages a chance to rebuild equity to the point where they can refinance.
  3. Inflation takes a holiday. In the first quarter of this year, inflation was rising at a rate that threatened to take it higher than the level of 15-year mortgage rates, and possibly up to the level of 30-year mortgage rates. That would probably have made those low mortgage rates unsustainable -- or at least unattainable, as the lack of a cushion over inflation would have removed all incentive for lenders to make loans. However, inflation took a holiday in April, with the Consumer Price Index registering no increase for the month.

If the current value of your home is the primary obstacle to refinancing, then keep in mind that time is on your side. With each monthly payment, you can narrow the gap between your mortgage balance and the home's value.

If, as the above developments suggest, home prices are stabilizing and mortgage rates are settling at low levels, it means the opportunity to refinance will continue to open up for more and more homeowners who were originally blocked from this opportunity by an underwater mortgage.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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