Homeowners who plan to refinance their mortgages in 2014 may find it hard to do so, if not impossible. Rising mortgage rates could close the refinancing window for some homeowners next year. But rising home prices and equity levels could offset this problem, to some extent. Here are three things homeowners should know about refinancing a home in 2014.
Rising Home Prices Could Help You Refinance in 2014
Do you have enough equity to refinance your mortgage loan in 2014? This is one of the first things the lender will want to know. They’ll send a licensed home appraiser to find out what your house is worth in the current market. Forget about the amount you paid when you first bought it. Forget about your current mortgage balance. Those numbers do not determine the current value of your home. The market does.
The good news is that home prices have risen in most parts of the country over the last year. Here are the latest numbers from several key sources:
- According to a recent report from the National Association of Realtors, median sale prices rose in 88% of metropolitan areas (144 out of 163) in the third quarter of 2013, compared to a year earlier. One third of the metros experienced double-digit gains.
- The Case-Shiller price index released last month showed a 12.8% rise in home prices during the 12 months ending in August.
- According to the CoreLogic “Market Pulse” report for November 2013, U.S. home prices were up 12% in September compared to the same month a year ago.
Rising home prices will make it easier for some people to refinance their mortgages in 2014. Property appreciation builds equity, and home equity is a necessary ingredient for most refinance loans (unless you use the government’s HARP program).
You can get a feel for local home prices in several ways. One of the easiest ways is to go on Realtor.com or Zillow.com and see what similar properties are selling for in your area. This is what real estate agents refer to as comparable sales, or comps.
If you really want to know where you stand, have a licensed appraiser determine the value of your home. Expect to pay around $250 – $450 for an appraisal, depending on the size of the home and the complexity of the appraisal process.
The bottom line: If you plan to apply for mortgage refinancing in 2014, you should start researching home-price trends in your area. If you sit back and wait for the lender’s appraisal to come in, you might encounter an unpleasant surprise.
Rising Mortgage Rates May Work Against You
While rising property values work to your advantage when refinancing, rising mortgage rates can work against you. Most homeowners who refinance in 2014 will have one overriding goal — to get a lower mortgage rate, thereby reducing their monthly payments. This is the primary goal for most homeowners.
The higher the rate on your new loan, the less money you will save every month. This pushes your break-even point (the point at which your savings begin to exceed your upfront closing costs) further down the road.
Most analysts expect mortgage rates to rise during 2014, especially if the Federal Reserve winds down its “quantitative easing” stimulus program, as they are expected to do. This means homeowners refinancing a mortgage in 2014 could face higher interest rates and overall financing costs. As a result, many who wish to refinance next year may be unable to do so.
The Mortgage Bankers Association (MBA) recently forecast a 57% decline in refinance loans in 2014. Talk about a market shift. Jay Brinkmann, chief economist for the MBA, said he expects to see rates rise above 5% sometime in 2014. And he’s not alone. Freddie Mac’s chief economist predicted the same thing on a radio show back in September.
Speaking of Freddie Mac, the government-controlled mortgage giant recently stated that 2014 will bring a “transition from a refinance-dominated mortgage market to the first purchase-dominated market the industry has seen since 2000.”
The message is clear. Mortgage refinancing in 2014 will be “reserved” for a select few. Rising interest rates will make refinancing financially unsound for a large percentage of homeowners.
New Lending Rules Emphasize Debt Ratios
For years, equity has been the primary consideration when refinancing a home. With certain government programs aside, homeowners typically need a certain level of equity to qualify for a refinance loan. In 2014, lenders may put renewed emphasis on debt-to-income (DTI) ratios, as well. This is a result of new lending rules scheduled to take effect on January 10, 2014.
The Qualified Mortgage (QM) rule, in particular, requires borrowers to have “a total (or ‘back-end’) debt-to-income ratio that is less than or equal to 43 percent.” For a temporary transitional period, borrowers with DTI ratios above 43% might be considered “QM-compliant,” as long as the loan is otherwise eligible for sale to Fannie Mae or Freddie Mac.
Borrowers with compensating factors, such as an excellent credit score or a history of making mortgage payments on time, may be able to refinance even with a DTI above 43%. But for many homeowners, this could be a deal-breaker for refinancing in 2014.
Some lenders may be willing to offer “non-QM” loans. But these will be few and far between. In exchange for generating home loans that meet the QM parameters, lenders receive some degree of legal protection from consumer lawsuits. This will be a big incentive for lenders in 2014. As a result, these new rules could eventually redefine the U.S. mortgage market.