Mortgage Refinancing Doesn’t Always Make Sense. Here Are Some Alternatives.

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In these difficult economic times, with record low mortgage rates, refinancing seems like a great option to manage debt. Many Americans find themselves with a shortage of cash on a month-to-month basis, and others are looking to create more financial stability for long-term reasons. “What we’re learning right now amid the great lockdown economy is that having access to money is really important,” says Jill Schlesinger, CBS news analyst and author of “The Dumb Things Smart People Do With Their Money.” “That may mean you need some extra liquidity.”

Are there alternatives to the refinance, though? Even if you think you’d be approved for a mortgage refi loan, it pays to explore the options. The CARES Act included provisions for delaying payments on Fannie Mae and Freddie Mac loans, and many private lenders are following suit. If you find yourself in a situation where you can’t make your mortgage payments, it’s worth it to contact your banker first to see if they will work with you to create a more flexible payment plan. But there may be more options to consider, as well. 

Cash-Out Refinance Mortgage

If you are concerned about the longer-term consequences of the pandemic, or just want to have the money to eliminate long-term debt, such as tuition costs or credit card debt, cash out refinance rates are also low. A cash-out refi is where you finance an amount in excess of what you owe on your mortgage, thus giving you additional capital to work with. Cash-out refi rates may be the same as regular refinancing, or they may be a bit higher — your lender can give you more information on what they’re charging.

For example, if you owe $100,000 on your mortgage, and you have enough equity in your home to do so, you might do a cash out refinance for $140,000, and use the extra $40,000 to pay down debt costing you higher rates of interest. Some people also use a cash-out refinance to fund home renovations.

Not all experts agree on the use of a cash-out refinance option during uncertain times, though. Austin Weyenberg of financial literacy site The Logic of Money says he would not recommend cash-out refi during the pandemic: “If you cash out when you refinance and home values plummet, you may end up in a position where you owe more on your mortgage than what your house is worth.” 

Apply With Another Lender

There’s truth to the adage: “If at first you don’t succeed, try, try, again.” Mortgage refinancing is rigorous, and your chosen lender’s response is based on numerous factors, including your debt-to-income ratio, credit rating, income, your home’s assessment, and more. Just one issue may be enough to result in a negative response.

If that happens, the lender is required by law to tell you why they turned you down. If it’s something you can fix, then do so. But even if not, remember every lender has its own proprietary formula for determining when to make a loan. Another bank may weigh your credit rating differently and come back with a yes. 

Take Action to Improve Your Situation and Apply Later 

If your circumstances don’t allow you to refinance right now, and you know you can’t qualify for assistance based on your financial situation, there’s no reason you can’t take steps to improve your odds and try again in, say, three or six months. Rates will, according to the experts we’ve talked to, most likely still be low at that time.

Take steps to improve your credit score 

Your credit score is one of the most heavily weighed factors when banks determine if they will approve your application. But it’s also one you can improve by paying down debt when possible and checking your credit reports to ensure there are no errors. Asking the credit bureaus for your annual free credit reports is your first step. If refinancing is your goal but your credit situation needs improvement, we recommend taking important steps to rebuild your credit. When you see your score improve, go ahead and try again. 

Pro Tip

If you don’t qualify for a good refinance rate, take action to improve your credit score. Improving your score will allow you to potentially refinance later on and also open doors in other areas such as approval for car loans, credit cards, auto insurance premiums, and even employment.

Improve your debt-to-income ratio  

This number indicates your debt compared to your total overall gross income. You want it to be roughly lower than 36%, which is the cutoff many bankers use when determining who will get a mortgage. You can easily find this number with an online calculator. If you carry too much debt to qualify, experts recommend doing your best to pay off high-interest debt, decrease your debt-to-income ratio closer to the 36% mark, and try again with refinancing. 

Find stable income  

We know in the current economy, it’s easier said than done, but finding a stable income source can be an essential element in finding a mortgage at a low rate. Your banker will look at your tax documents for the preceding year to see if there’s a steady, stable income. “This is really a hard time to get a loan approved if you don’t have income,” says Schlesinger. “Maybe in a two-income family where you’ve lost one of the incomes, you might be able to qualify.” Even temporary work, she says, is better than nothing, but a preferably full-time, paying job is important.

Consider exploring these four industries, which are hiring widely: pharmacies, telecommunications, grocery stores, and tech support. Some of these have remote opportunities available, no matter where you live, which could be particularly appealing since in-person work comes with the added risk of virus exposure as long as COVID-19 continues to spread and be a concern.

Increase your income

It may not be the best time to ask your boss for a raise, but that depends on the sector you work in. If you’re in an essential service, you may be getting hazard pay — though that’s not true across the board. Since many industries are hiring part-time workers, there may be an opportunity for you to increase your income with additional work.

If you’re underwater 

In mortgage terms, being underwater means owing more to your mortgage holder than your home is currently worth. If this is the case, your best bet is to hold on until you have additional equity in the home and are in a better place financially to pursue and take advantage of any type of refinancing. If that’s not possible, take a look at the programs we’ve listed above to may help you get your head above water.

Find a Housing Counselor 

Housing counselors can help you with buying a home or advise you about financial difficulties, such as a default, foreclosure, or credit issues. The government’s Consumer Financial Protection Bureau maintains an extensive listing of counseling agencies to get you started. Working with a counselor can be the first step in getting back on firm financial footing.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) or home equity loan can give you a source of ready money as needed if current circumstances have you strapped. It’s probably not a good idea to use the money frivolously, because you need to repay it eventually. But during a crisis such as the pandemic, a HELOC can help you pay credit card debt or other financial commitments to keep you from having to consider bankruptcy. 

Reducing Home-Related Costs

Tasha Cochran, a real estate lawyer who blogs at One Big Happy Life, suggests you look for untapped resources related to your home if you aren’t successful with a refinance and need financial resources. “You can appeal your property tax assessment by contacting your county tax assessor and providing them with information to support your appeal,” she says. She also recommends taking a hard look at your homeowners insurance policy. It’s possible a switch to a new insurer could save you money on your premium. You can also consider raising your deductible or cutting optional riders such as computer insurance. 

Experts recommend making a budget and looking at how you can cut discretionary spending to free up cash flow for other expenses during a difficult financial situation.

Consider Special Government Assistance Programs 

If you are hoping to refinance due to the disruption the pandemic has caused to your financial life, there may be assistance from the government and other agencies to help you get back on your feet. Here is a list of some alternative relief resources:

National Mortgage Assistance Center: The NMAC assists troubled homeowners to avoid foreclosure through a national network of attorneys who are specialized in helping you to avoid losing your house. These lawyers will work with you and your bank to develop a plan of monthly payments you can handle.

Foreclosure Assistance Programs: This website, Making Home Affordable, is a creation of the U.S. Department of the Treasury and Housing and Urban Development. It’s a clearinghouse for government programs to help homeowners in trouble, whether their financial situation is short-term or long. 

Enhanced Relief Refinance: If you have a Freddie Mac mortgage and your loan-to-value ratio (how much you owe compared to your home’s value) exceeds the maximum allowed for a regular refinance, you may be eligible for an Enhanced Relief Refinance. Your loan must be dated after October 1, 2017, to be eligible, and you must be current with your payments.

High Loan-to-Value Refinance Program: Similar to the Enhanced Relief Refinance, but for owners of a Fannie Mae mortgage, this loan allow borrowers to reduce monthly payments, lower their interest rate, shorten the loan’s term, or move to a more stable mortgage, i.e., from an adjustable-rate to a fixed rate.

Hardest Hit Fund Programs (HHF): The HHF is a government program that exists in 18 states and the District of Columbia for struggling homeowners. It may help you if you are underemployed and can aid with principal reduction and elimination of second lien loans. It is also available for those who are transitioning out of their homes and into more affordable living situations.

Affordable Unemployment (UP): The Home Affordable Unemployment Program can help you if you are unemployed and eligible for unemployment benefits. Depending on your situation, UP may help you reduce or suspend your monthly mortgage payments for up to one year.

Principal Reduction Alternative (PRA): If your mortgage is not Fannie Mae or Freddie Mac, and it originated before 2009, and your home is worth less than you owe, this federal program can help by encouraging mortgage lenders to reduce the amount you owe.

Loan Modification: A loan modification is, simply put, making a change to your mortgage so it’s easier to pay. Lenders generally don’t want to go through the foreclosure process, and thus they may provide ways to enable you to pay for your mortgage with lower payments during times of financial stress. To explore this option, contact your loan holder.

Forbearance: Similar to loan modification, this refers to the temporary postponing of your mortgage payments. Schlesinger says bankers have relaxed their standards to work with those impacted by COVID-19. “They are essentially granting people a grace period,” she says. But, she cautions, every company is handling it differently, and you’ll need to be alert to any added fees that might result from the forbearance. 

Under the CARES Act (Coronavirus Aid, Relief, and Economic Security)

Forbearance Agreement: Under the CARES Act, you won’t have to pay back the amount suspended all at once, unless you want to, if you have a Fannie Mae, Freddie Mac, FHA, VA, or USDA loan. At the end of the forbearance period, you can ask for the missed payments to be spread out or saved for a lump sum payment at the end of the loan period.

Foreclosure Moratorium: There was a moratorium issued on all federally backed mortgage loans through May 18, 2020. Even after that point, foreclosure processes cannot start for 180 days, which can be extended at the borrower’s request for an additional 180 days. 

Why This Is Important 

It’s important to know you’re not alone if you are facing financial hardship. Many people from all walks of life are facing challenges they couldn’t have anticipated only months earlier. The government has responded with the CARES Act and is considering further legislation to provide relief to homeowners, small business owners, and others who have been impacted.

Relief organizations of all sizes, from local up to federal, are pitching in to help in a broad range of ways. Our list of government assistance programs is a good place to start looking. If you qualify for assistance, you may be able to weather the financial storms of COVID-19 and balance your debt to income more successfully.