Mortgage Applications Rise as Homeowners Look for Additional Savings

[Apr 23, 2009.]

 

The Mortgage Bankers Association said Wednesday that mortgage-refinance applications rose to almost triple their level a year ago. The average contract interest rate for 30-year, fixed-rate mortgages stood at 4.73%, down from more than 6% a year earlier. slightly above the all-time low of 4.61 percent three weeks earlier. About 80% of all mortgage applications are for refinancing.

Requests for new loans had also fallen in the prior week, after five straight weekly increases, as the Good Friday and Passover holidays dulled business.

Not every borrower is finding savings after they apply to refinance their mortgage. Higher fees and costs can, at times, wipe out any benefits for refinancing. Some borrowers simply opt for converting an adjustable-rate mortgage into a fixed-rate mortgage at the same or slightly higher rate simply to avoid any future increases.

There are of course many who simply don't qualify as well though it's hard to get a firm number on those that get approved versus those that don't. Homeowners may have trouble qualifying due to a lack of income, loss of employment, credit challenges, or lack of liquid assets to meet reserve requirements. Many homeowners are also finding that their homes have depreciated to the point where they no longer have enough equity to meet underwriting guidelines.

Those borrowers who are able to qualify to refinance their mortgage at a rate that allows them to reduce their monthly payment need to take a close look at where the real payment reduction is coming from. While a lower will certainly play a key role, many times the return to a new 30 year amortization schedule will also make a large impact on the monthly payment.

For example, if a homeowner borrowed $200,000 at 6 percent exactly 7 years ago, their monthly principal and interest payment would be $1,199.10. If they made that exact payment every month for the last 96 months, their current remaining principal balance would be $178,976.06. Their monthly payment, as of this month, would represent $896.39 in interest and $302.71 in principal reduction.

(Click here for a mortgage payment amortization calculator)

Now, if they were to refinance the current remaining principal balance ($179,000) into a new 30 year fixed loan at 5 percent, their new monthly payment would be $960.91. Their monthly payment savings would be about $240.The monthly payment, in the first month, would represent $745.83 in interest and $215.08 in principal reduction. The interest savings is only $150 per month - or 62 percent of the monthly savings.

To truly benefit from this refinance, if the homeowner could afford it, they should refinance at the new lower rate, however, pay on a 23 year schedule instead of the new 30-year amortization schedule. If they were to do this, their monthly payment would be $1,092.62 which is still less than what they are currently paying. Doing so would allow the borrower to cut the repayment term down by 7 years and save them approximately $44,350 in interest over the life of the loan (versus paying on the new 30 year schedule).

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.