The Federal Reserve’s decision last week to cut a key interest rate has sparked a stampede to lenders by customers eager to refinance or buy homes on the cheap.
“I don’t know if there would be a better time,” said Sheanna Umpleby, a first-time homebuyer from Lakemoor. “I’m lucking out with a super low interest rate and low home prices.”
Mortgage brokers were quoting rates as low as 4.5 percent last week – a day after the Federal Reserve’s Dec. 16 announcement that it was cutting the federal-funds rate – the rate charged between banks for overnight loans.
“It went lower than expected,” said Phil Sweeney, a McHenry resident and loan officer with BancGroup Mortgage of Buffalo Grove. “We were advertising 4.5 percent interest rates, then 4.75. That lasted about an hour. By mid-day it was at 4.875 percent and by Thursday it reached 5.125 percent. It hit fast, the market sold off and then it [the rate] moved off. We were in on a feeding frenzy for a day and a half.”
Umpleby, a tile store manager in her mid-20s, said she was quoted an interest rate of 5.25 percent on a 30-year fixed mortgage; with payments comparable with the $1,000 a month she now pays to rent an apartment. She hopes to put 5 percent to 7 percent down on a $200,000 house in Lake Zurich.
JoeAnn Hurst was able to refinance her house, including $100,000 for a remodeling project, and keep her payments about the same. Her interest rate fell from 6.5 percent, which she secured about 18 months ago, to 5 percent.
Martin Sloan, a loan officer with Milestone Mortgage Solutions Inc. of Lake in the Hills, said those paying off mortgages could save as much as $500 a month. In fact, as little as 0.5 percent could be reason to refinance – especially if you have an adjustable-rate mortgage and plan to remain in your home for more than a couple of years.
“If you owe $100,000 on a loan, you need to have a pretty considerable cut, at least a point or more, to make it worth refinancing,” said Jorge Gomez, president of the Illinois Association of Mortgage Professionals. “But if you have over $200,000 on a 30-year mortgage, as little as a half-percent or five-eighths percent can make a difference.”
But not everyone can qualify. It turns out this easy money is not so easy to come by.
“A lot of their ability to refinance has to do with equity – whether a house has kept its value or lost its value,” Sloan said.
“The loan-to-value ratios are tighter. Now, if you have good credit, you could refinance at 95 percent loan to value. But if your credit is poor or lower, you need more equity.”
The problem, Sloan said, is especially acute among those who previously managed to finance the entire purchase price of their home. In many cases, the value of their property is less than what they paid for it.
And forget about being able to avoid a down payment in the future.
“People still have to have equity in their house and the right income to be able to [refinance],” Sloan said.
“The problem with 0 percent down is if you lose your job or can’t make a payment, you just walk away. You have nothing invested.”
Mike Farrington, a mortgage banker for United Mortgage Services in McHenry, said he received numerous inquires. But qualified individuals need at least 15 percent equity, he said.
However, loans through Fannie Mae and Freddie Mac could allow as little 10 percent to 15 percent equity.
Others factors include credit scores and whether an individual is refinancing, in part, for cash.
“It’s kind of a throwback to the way things used to be,” Farrington said. “You really need to be credit worthy, no question about it.”
Gomez would like to see Congress streamline the process to allow people who have made their payments on time and followed the rules, but lack the financial wherewithal, to take advantage of the lower rates.
“It’s making the best of a bad situation and it’s not costing the government one iota,” Gomez said. “The consumer already has the loan.”
David Hanna, president of the Chicago Association of Realtors, echoed Gomez’s concerns.
“The realtor association is calling upon the federal government and mortgage industry to address continuing problems that are impeding the delivery of mortgage credit to potential homebuyers,” he said in a statement.
“Mortgage insurers need to make sure they have not over-corrected and added unnecessarily strict underwriting standards preventing people from qualifying for a mortgage.
“The lack of practical and affordable loans will continue to stymie the recovery effort.”
