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By Jim Copeland
February 2009 (San Diego) — At the end of 2008, as mortgage rates fell to
around 5%, homeowners helped to start a mini-refinance boom. Recently,
self-doubt has crept in as rates have inched upward since January 14, 2009
Rest easy, friends. You're not missing out.
Nevertheless, the refinance boom has homeowners wondering whether it would
be a good idea to cancel their refinances-in-process and wait for rates to
fall back into the upper 4% range.
Speaking frankly, this is a terrible idea. And I have nine
really good reasons why.
1. You could unexpectedly lose your job. Nearly 2,000,000 people have
been fired in the last 12 months and each week, more layoffs are announced. No
job, no mortgage approval.
2. Mortgage lenders could reduce loan-to-value limitations. Suddenly,
having a 20 percent equity stake may not be enough. You may need 25 percent
or more. Homeowners with jumbo and investment mortgages are especially
susceptible here.
3. Your home could be damaged in a winter storm. Your home could be
damaged in a winter storm—and in Southern California, wildfire is an ever-present
risk that can damage or destroy homes. Then, as soon as a state Governor requests
federal aid, mortgage lenders start to put closings on hold pending home re-inspection. Damaged
homes don't get their new mortgages.
4. Mortgage insurance rates could rise. Private mortgage insurers have lost
billions this year and have twice raised premiums to even up the balance sheets. Default
rates show few signs of abatement so it's likely that PMI rates will rise again
in 2009.
5. You could fall ill or get injured. Even for insured Americans, medical
issues are the second most-common trigger-event for home foreclosures next
to income curtailment. If illness should keep you from working, or leads
to long-term disability, your likelihood of getting a home loan is dramatically
reduced. Nobody ever expects to get sick.
6. Banks could tighten lending guidelines. Well, we already know that
is happening. With each passing week, it gets tougher to borrow mortgage money
for one reason or another.
7. A nearby foreclosure could lower your home's value. Mortgage rates
are highly sensitive to a home's value versus the amount of money borrowed
against it. Foreclosures (and other "fire sales") bring down
the Fair Market Value of every home nearby. This leads to higher loan-to-value
ratios and, therefore, higher mortgage rates.
8. Your credit score could fall unexpectedly. Credit scores are meant
to predict the likelihood of mortgage default and the model appears to have
failed these past few years. Anecdotally, there's evidence that the credit
bureaus are correcting that. Carrying high balances or opening new trade
lines appears to be more damaging to credit scores than it used to be. Lower
credit scores means higher mortgage rates.
9. Mortgage rates could rise, not fall. Look, nobody knows what rates
will do tomorrow. Anyone who says they do is lying. The only thing
predictable about mortgage rates is that they're unpredictable. Take
what you can, when you can. You can always refinance again later.
And, if you want to throw a tenth reason in there for good measure, use this:
it is bad karma to cancel a loan. The Mortgage Gods never forget and
-- someday -- it'll come back to bite you in the arse.
Jim
Copeland is a senior loan officer with Windsor Capital Mortgage. Over the
last 20 years, Jim has assisted homeowners in making educated and informed
decisions regarding real estate finance.
Get quick, accurate and honest answers from Jim for all your residential
lending questions. Contact Jim at loandoc@eastcountymagazine.org.
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