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Barack Obama walked out of his broker’s office with $40,000 and a funny feeling that he “got away with something.”
It was the mid 2000s, and the future president had just completed a cash-out mortgage refinance on the three-bedroom condo he shared with Michelle in Chicago’s Hyde Park neighborhood.
The transaction had been simple — almost too simple, as he writes in A Promised Land, his most recent memoir that came out last month. Neither the broker nor the appraiser inspected the condo, nor had the bank scrutinized the Obamas’ finances beyond a few months of pay stubs and bank statements. When it was done, the couple had a lower interest rate, a resulting monthly payment $100 cheaper, and a new mortgage worth thousands more than what they owed on the condo. The $40,000 surplus was delivered with a check.
For the Obamas, the cash-out refi was a good deal. They needed the cash. “Money was perpetually tight,” Obama writes of the time they were raising two young daughters. “The cost of child care, school fees, and summer camps kept rising, while the principal on our college and law school loans never seemed to decrease … Our credit card balances grew. We had little in the way of savings.”
But in retrospect, the speedy transaction was a sign lenders were getting lax in their standards for extending credit. The market was like a “real estate gold rush,” Obama recalls. Interest rates were low, home prices were climbing, and as he experienced himself, it was relatively easy to get a mortgage. It seemed like everyone was becoming an amateur house flipper. Those who already had mortgages were cashing them out like Obama had — using their home equity as a “personal ATM,” he recalls.
Though the banks were happy to offer all this credit — because they could bundle it up into mortgage-backed securities and sell the debt to someone else — this widespread practice left millions of people vulnerable to taking on more mortgage than they could afford. The Federal Reserve Bank of Chicago estimates nearly four million homes were foreclosed on between 2007 and 2010.
In 2009, Obama became president and inherited an economy in ruin, thanks largely to the collapse of the housing market. It had crumbled under the weight of foreclosures, delinquencies, and devalued mortgage-backed securities. Once the beneficiary of easy credit, Obama spent the first part of his presidency trying to clean up the economic damage it had helped to cause.
Refinancing in 2020
What’s striking about Obama’s refinance some 20 years ago is just how different the housing market looks today. Mortgage rates were relatively low in the mid 2000s, but now they are historically low, presenting even more opportunity to lock in a more affordable rate and save on interest and monthly payments.
However, banks are anything but lax when it comes to extending credit. After a year in which the economy stalled and millions lost their jobs, lenders have been risk-averse, fearing homebuyers might eventually default. And with interest rates dropping so low, they’re experiencing a surge in demand, enabling them to choose only the most qualified borrowers, says Michael Neal, a senior research associate in the Housing Finance Policy Center at the Urban Institute. The median credit score on a completed mortgage purchase was 764 in October, up from 741 in February, according to data from the Urban Institute.
Banks including JPMorgan Chase and U.S. Bank have raised the credit score requirements for new loans as high as 700. Even for government-backed loans, many lenders are asking for credit scores well above the 580 minimum set by the Federal Housing Authority (FHA), says Neal.
For those who do manage to get approved, the financial evaluations are more rigorous, with multiple touchpoints. Only one day before she was due to close on a new home, the lender working with NextAdvisor contributing editor Farnoosh Torabi called her accountant to verify her employment one last time, just in case.
To be sure, now is still a great time to refinance — assuming you can get approved and pass the financial background check. It usually makes sense to refinance when you can lock in a significantly lower interest rate, which will lower your monthly payments and save you in interest over time. (You don’t have to pull out any equity, as Obama did.)
However, as NextAdvisor contributor Suze Orman and others have warned, refinancing doesn’t make as much sense if it means you’ll be financing your home for a longer period of time than what remains on your current mortgage, or if you’re likely to move in the next few years. You should also be aware of the closing costs required on any new mortgage (including refinances), which can total between 3% and 6% of the loan amount. Use this refinance calculator to see if a refi is right for you, and how much you’d save.
For better or worse, most of us will have a harder time walking out of our broker’s office with a $40,000 check than Obama did 20 years ago. But for those in a strong financial position — meaning you have great credit, a steady income, and emergency savings — refinancing is even more appealing.
And you won’t have to feel like you got away with something.