That's troubling news for some homeowners who bought during the last two or three years using interest-only mortgages, payment-option plans or adjustable-rate mortgages that allowed for quick escalation of the interest rate.
If you're looking for a refinance you can expect lenders to be more demanding about your credit, ability to document your income and the appraised value of your home. They're less likely to OK new mortgages if monthly payments consume more than 28 percent of the borrower's monthly gross income, or if, combined with payments on other loans, debt repayment consumes 36 percent or more of income.
Any would-be refinancer should first determine if their current mortgage includes a prepayment penalty. "Prepayment penalties are very common," says Lez Trujillo, national field director for Acorn Housing, a nationwide homeownership counseling service headquartered in Chicago. "When you got such low interest rates with an adjustable-rate mortgage, the hook was you couldn't get out of it very soon," she says. Penalties can equal six months of interest payments, and they're triggered if you refinance (sometimes even when you sell the home) within two or three years of the loan.
"A number of lenders are waiving prepayment penalties," says Trujillo. "It doesn't hurt to talk to the lender and ask them to waive it." But prepare yourself to be told that your mortgage has been sold to investors (which happens frequently), and that a waiver could only be granted with the OK of the investor.
Trujillo says lenders may be willing to work with borrowers to help avoid delinquent payments and foreclosures. The key is to get the process moving before you fall behind on payments. "If borrowers are on time with the loan they should pick up the phone and see if the lender can help them," she recommends, adding that to avert foreclosures, some lenders have approved interest-rate reductions without requiring the owner to refinance.
Of course, borrowers trying to escape difficult loans before their payment adjusts to an even higher rate need to be careful that a refinance would truly offer more than temporary respite. Even if you had subprime credit before, don't assume that's all you can qualify for now. There's no need to start your search with lenders (or mortgage brokers) that target credit-challenged borrowers; start with mainstream lenders and see what they can offer you.
All refinancers need to take into account all the costs involved with getting a new mortgage. Even if a loan is billed as a "no-cost" refinance it may mean the transaction expenses have been rolled into either the new interest rate or into your new loan balance. Refinance expenses usually include appraisal fees, document processing expenses, and fees for a new title search and title insurance. You may be able to snag a cheaper "reissue" rate on the title insurance if you go with the same company that did the title work just a couple of years ago. Be sure to ask for it.
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