Home > Refinance Your Mortgage during the Recession
Use the Recession to your Advantage
Ok now just calm down. I know, I know, you're hearing it every day from dozens of different sources. The economy is tanking and if it keeps going downhill you might lose your home.
If you're like me and you purchased a home between 2003 and 2007, you're probably worried about that ARM resetting soon, or maybe you're worried because you just got a letter from your lender telling you they can no longer extend credit on your equity line because your home isn't worth as much any more.
Well don't sweat it. People are definitely freaking out over the recent economic dip, but they're just looking at it wrong.
A Recession is a great time to make power plays
When the economy is down and everyone is fretting over a few lost dollars, those who are wise and can see a bigger picture stand to make a killing off the downturn.
Historically, market corrections like what started in late 2007 and continues today, disappear within a few months, a year or two at the most. Everything is being revalued: real estate, stocks, companies, money, debts and loans, you name it. It's all coming down as we speak.
You can look at this one of two ways. It's either a big loss, or it's a big opportunity to get in on some cheap investments while the getting is good.
See, all markets work in cycles. They go up and down, high and low, peaks and bottoms. Instead of panicking and holding tight while we descend into a market valley, what if you started buying things up and taking full advantage of the low rates and cheap stocks to plan for a better financial future when the going gets good again?
Here's another perspective. If you're buried in your mortgage right now then you already have it tough. You're going to be eating ramen noodles and frozen peas for a few months anyway, so why not give up a couple other extravagances (cigarettes, beer, nights out, air conditioning, etc, etc) and put the savings to use.
Refinance Now While the Rates are Low
In 2009 the Federal Reserve cut interest rates for the 8th time since September 2007, down to 3.25% as of Jan 1, 2009!
It is now possible to refinance your home with a new 30 year loan at 3.75% (maybe lower!), depending on the lender you choose and your credit history. If you've been good, and you have a credit score of 680 or higher, chances are high that you can refinance your home at a lower rate.
Even if your credit is not perfect, there are still many lenders that will help you refinance, especially now with the Prime Rate being so low! Seriously, when I first wrote this article the rate was 6% even, but now it's down to 3.25%! If only I hadn't refinanced months ago, I could be locking in an even lower rate right now!
When I bought my home in late 2006, I paid $335,000, and I had a no-doc 80/20 loan from Countrywide (which has since been absorbed into Band of America). That means I financed 100% of the price of the home and only paid closing costs, which totaled just over $10,000. My wife and I worked multiple jobs, long days, and were already keeping our expenses as low as possible to make the mortgage payment every month. It was $2200 for the primary and $700 for the second mortgage, but that second was an interest only loan, so if we wanted to make any progress on it, we had to pay extra to bring the principle down.
Our interest rate was 6.75% on the first loan, and variable on the second (as high as 12.75% sometimes -- yikes!). After a year of working hard and making extra payments, we had brought our second mortgage down by about $12,000, which lowered the interest payments to right around $500.
In early 2008 we heard about the prime rate cuts and started hearing that a re-fi might save us lots of cash. We had been making payments on all our bills and debts, and my credit score was just over 700. We talked to our mortgage broker, and sure enough, for about $12,000 in closing costs, we could refinance our entire home down to 5.75%. Here is the difference it made for us:
|Months to recoup closing costs:||11.2|
So as you can see, the numbers are quite surprising. Our monthly payments fell by over $1100! That is absolutely huge for us today.
Imagine what a refinance could do for you and your family! With the extra cash each month, we are able to pay down the mortgage even more, thus reducing the interest costs over the life of the loan. In fact, the interest savings are so big, it's almost unbelievable. After the re-fi, we're saving $300,000 in interest over the life of the loan! That's a savings of over $10,000 each year!!!
Go now, don't wait, choose one of the loan providers below to see how much you can save on with a refinance today. How can you afford to wait?
What it takes to Refinance your Mortgage
Unfortunately for us homeowners, refinancing a home mortgage is not as easy as it used to be. This is because there are loads of new regulations governing home loans, and banks are much less likely to hand out new mortgages without proper income documentation.
Banks will want to see proof that your income is sufficient to make the monthly payments on your mortgage while still maintaining your standard of living. So they will pull your credit and see how many other debts and obligations you have, add up the minimum monthly payments and then see if it all makes sense on paper. Most banks want to see your last two years of income. If the first year is lower than the current year, they take the average, otherwise they just base their calculations on your income from the last year.
For self-employed individuals, this can be pretty rough, depending on the situation. But, even if you don't meet the income requirements for a normal refinancing, find the name and phone number of a loan specialist at your bank and see if they offer a "streamline" service for existing customers. Since your loan is already owned by your bank, they are oftentimes capable of simply looking at your past payment history and then approving a refinance without digging any deeper, since they already know you have been making the payments on time in the past. Bank of America is known to provide this service.