Refinancing criteria: Can you qualify?

November 07th, 2011

Home refinances have been changed by new guidelines that can affect the answer to the question: "Should I refinance?"

Use a free mortgage refinance calculator to evaluate your proposed loan according to the following new criteria.

Three changes that impact mortgage refinancing

Impounds required:

Most lenders require property taxes and homeowner insurance to be included in your monthly mortgage payment. the lender then passes the payments on to the counties and insurers, making sure your home is insured and safe from property tax liens. Borrowers with at least 20% home equity may get out of the requirement by paying a fee (usually .25%) to avoid impounds.

The Home Affordable Refinance Program, or HARP, requires impounds on all home refinances where the mortgage balance exceeds 90% of the home's value. This makes the refinance loans less risky for lenders (and for the US government when it owns or guarantees the loans).

Net tangible benefit

The concept of net tangible benefit has been around for many years, and many loan originators have used their own rules of thumb to help their clients to determine if a home refinance made sense.

Fannie Mae, Freddie Mac and lenders now require proof of the net tangible benefit before approving conventional "rate-and-term" home refinance applications. A rate-and-term home refinance means refinancing to improve on the rate or the terms of the old loan, not taking cash out.

Use a free mortgage refinance calculator to determine the potential net tangible benefit to your rate and term home refinance. To qualify, at least one of the following must apply:

  • A significant reduction in your monthly mortgage payment (generally 5% or more)
  • A reduction of 0.50% or more in your interest rate
  • A reduction in the term of your mortgage (i.e., from 30 years to 15 years)
  • A conversion from any adjustable rate mortgage (ARM) to a fixed rate mortgage

The purpose of this policy is to prevent "churning" by loan originators--or in other words, to prevent home refinances that do not sufficiently benefit the borrower, but instead allow unscrupulous originators to simply collect commissions.

30 Yr. Fixed - Refinance Rates from Our Lenders in California

Lenders
Rate
APR
Monthly Payment
American United Mortgage Corporation
3.750%
3.804%
$695
Quicken Loans
4.500%
4.626%
$761
CloseYourOwnLoan.com
3.625%
3.869%
$684
 

Cash out

Any home refinance that pays off a home equity loan or line of credit is considered cash-out (unless the home equity loan or line was used to purchase the home to avoid mortgage insurance, and ther). In the past, a home equity loan payoff was considered rate-and-term, as was the payoff of a credit line that had not been accessed for at least a year.

Cash-out home refinances are more expensive than rate-and-term refis; surcharges can add several points to the cost of refinancing. These policies make cash-out refinancing less risky for lenders and more expensive for borrower.

Looking Forward

The mortgage industry is changing almost constantly; these last updates will almost certainly not be the last. When starting your home refinance with a mortgage professional, use a free mortgage calculator to ensure that you meet all relevant criteria and that your transaction goes smoothly.

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