Refinancing a viable option for certain homeowners

McALLEN - It sounds silly to borrow more money to save money, but after interest rates plummeted last week, it's an attractive option.

Refinancing is not as simple as just taking out another loan, but for homeowners it's a good bet - if they can qualify.

But, of course, there are caveats, lenders said. (Looking to refinance? Click here)

If you're in a home that's worth less than your loan, it's probably too expensive to go after a cheap rate. For the many locals who are still paying off subprime mortgages, refinancing is also likely not an option.

But with a 30-year mortgage rate at close to 5.5 percent, local lenders said qualified homeowners should consider refinancing, because no one knows when higher interest rates will return.

"To get the best possible rate you have to have two years of work history and a documented income," said Gary Kumar, branch manager for the McAllen office of Valleyway Mortgage.

On a $155,000, 30-year fixed-rate loan, a rate drop from 6.5 percent to 5.5 percent could reduce the monthly payment from about $979 to $880.

Refinancing involves taking out a second loan to pay off an existing loan. Homeowners typically do it to reduce their interest rate or change the time period they have to pay off the debt.

The option, however, is available to a shrinking number of homeowners as banks increase standards for borrowing. In addition to requiring proof of two years of stable income, banks are looking for a credit score above 600 for a standard loan and over 720 to guarantee the cheapest rates, lenders said.

Credit scores range from 300 to 850. Most lenders regard scores above 700 as a sign of good financial health. Scores below 600 indicate high risk to lenders and could lead them to charge a prospective borrower much higher rates or even turn down the credit application.

Mere Flores, branch manager for First Nation Mortgage Inc. in McAllen, said consumers need to consider whether they can afford the closing costs to reduce their payments, especially if the home isn't worth as much as it was when they bought it.

Home prices in Hidalgo County fell on average 7 percent in the past year according to the Real Estate Center at Texas A&M University.

A refinanced loan will likely cover up to 90 percent of the value of the house, and if the outstanding debt is already higher than the value of the home, the consumer will need to pay the difference before closing on the refinanced loan, Flores said.

"You can refinance, but we still have to go with the value and you need to come up with the money to be able to make the 90 percent, and not a lot of people can do that right now," she said. "Nobody in the (Rio Grande) Valley has extra money."

The paradox leaves no option for many people who are saddled with adjustable-rate mortgages and whose home values have fallen, experts said. Many people took out those mortgages with high interest rates, expecting to refinance once interest rates fell or their own credit score improved.

Mary Ann Aguilar, a McAllen-based mortgage broker, said those people are now stuck in their homes without any options.

"When is anyone ever going to get ahead?" Aguilar said. "There's no way they can get out (for the moment). It's really, really sad."

Let's say you bought a $150,000 house with a $142,500 loan and an interest rate of 7 percent. One year later that home is now worth $120,000, but you still owe almost $141,000.

The new loan would only cover $110,000 - 90 percent of the home's current value - so you'd have to pay the other $31,000 as soon as the new loan is signed.

And that doesn't include thousands of dollars in closing costs or fees from lenders and mortgage brokers.

Aguilar said she is working with two customers in similar situations. One of those involves a home that has lost $30,000 in value since the homeowner took out a $165,000 loan two years ago.

Borrowers need to consider how long they plan to keep the house and how long it will take to recoup the closing costs, lenders said.

Lenders also advised borrowers to beware of fraudulent lending schemes that entice consumers with phony e-mails and fliers. The Texas Attorney General Consumer Protection Division and the Better Business Bureau can be contacted to help verify if a lender is engaging in fraud.

The drop in interest rates came abruptly Nov. 25 when the Federal Reserve announced it would lend money to investors to encourage them to purchase consumer debt that is packaged into securities. Lenders return a profit selling those securities, which in recent months investors have stopped buying.

The Fed is expected to spend close to $200 billion on the program. It also announced it would buy $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.

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Sean Gaffney covers business, the economy and general assignments for The Monitor. He can be reached at (956) 683-4434.