These days, we are seeing so many markets doing some crazy things - and sometimes overnight. The housing market, or mortgages in particular, have experienced some drastic changes, both good and bad. Refinance activity alone has exploded up to 122% year-over-year in mid July. The Feds response to the current state of the economy has greatly helped the home mortgage market in some ways.
"It pushed the federal funds rate lower and increased its purchase of mortgage-backed securities, moves that tend to drive interest rates lower and free up more money for lending."
But what about home equity, and the role it plays in refinancing a mortgage? Even with the Fed's move to free up money, lenders are tightening the purse strings, and are becoming more choosy with whom they lend money to. This is why home equity is very important in these times.
Mortgage rates may be low, but when it comes to refinancing your mortgage, equity is very important. Say that your home is valued at $300,000 and you owe $200,000, your home would have $100,000 of cash value or equity. For most conventional refinances, you'll need at least 20% equity in your home in order to avoid Private Mortgage Insurance. This means you'll need a loan-to-value ratio of more than 80%.
Briefly, for those who are upside down on their home and owe more than the home is worth, or have little to no equity, you have a choice between two programs, Fannie Mae, and Freddie Mac for refinances for low to no-equity mortgages.
Alternatively, if you happen to have good credit, and you find a lender willing to give you a loan, you could pay down the amount owed with a personal loan:
After paying down the mortgage and conducting the refinance, the homeowner might consider applying for a home equity line of credit (HELOC) and using the funds to help pay off the personal loan, Polakovic said.
“Ultimately, this would lower their effective borrowing interest rate, as they would have brought down the interest rate and loan amount on their home from the refinance,” he said.
Bear in mind that economic uncertainty can make it difficult to get a personal loan unless you have good credit, and some lenders have ceased HELOC applications temporarily. Overall, this option requires understanding exactly how much new debt (in the form of the personal loan) you can take on while still falling below the maximum debt-to-income allowed for a refinance. If you’re unsure about any of this, consult a financial adviser before proceeding.
With all of that said, home equity matters a great deal, and could tip the scale for or against you. Does anyone else agree? Should homeowners take advantage of the current situation, and even attempt to refinance their mortgages despite low interest rates?