Why can't I refinance to lower my mortgage interest rate?
Filed under: Debt, Real Estate, Mortgage Confidential
Our readers have sent in numerous questions asking why they can't refinance to a lower interest rate, which will make it more affordable for them to stay in their homes. As interest rates reset, people in adjustable rate mortgages are finding their new rate jump to 7% or more. Meanwhile, mortgage rates for fixed rate loans are available at 5.5% to 6%, and with excellent credit scores possibly lower. So it's natural that these higher-rate people are looking to refinance.
Here's a recent reader question on the subject:
I have a 7% mortgage interest rate and wanted to refinance to a lower rate on my home.I got denied because they said my debt ratio is too high. I'm current on all bills. I keep 6k in savings for taxes insurance (not escrowed) each year. If you can pay the higher interest rate of 7%, why won't they give you a lower interest rate to lower your payments?
What's the answer?While the refinance may be more affordable for you, you've got to remember that banks aren't worried about that as much as they are about getting repaid. If your debt-to-income ratio is too high, the banks will consider you a risk. Right now most banks are looking for a debt-to-income ratio of 29% for home mortgage costs and 41% for all debt.
How does that translate into what you can afford?
Let's suppose you are making $60,000 a year. Multiply that number by 29% and the annual allowable mortgage costs would be $17,400. Divide that by 12 and your total mortgage costs, including principal, interest, taxes and insurance (PITI) can be no more than $1,450 per month with the new loan.
You then need to look at your total debt. Multiply $60,000 times 41% and the annual allowable total debt costs will be $24,600. Divide that by 12 and your total debt cannot exceed $2050. That means you can only have about another $600 in other debt payments ($2050 - $1450). That includes all credit cards, car loans and installment loans.
If your credit score is above 700, you may find a lender willing to work with slightly higher ratios, but in this market that will mean a lot of shopping. You also might be able to find more lenient debt-to-income ratios with an FHA refinance. The current debt-to-income ratios are much tighter than they were in 2005 to 2007, but I don't expect them to loosen up any time soon.
Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "The 250 Questions You Should Ask About Buying Foreclosures."
Reader Comments (Page 1 of 1)
2-11-2009 @ 11:34AM
Deacon said...
If someone doesn't slap the pres. and his congress, along with the mortgage geeks, real soon, it wont matter how much your debt ratio or your credit debt is ... It will be too late and you will have people in the streets, getting very angry..
Reply
3-01-2009 @ 1:39PM
basile said...
I think the honest and fairly responsable financial people are already there
2-12-2009 @ 10:31AM
A said...
because wall street wont have it that way !
The following are the group that helped create wall street welcome to the GRAND ILLUSION
Leonard Bleecker ,Hugh Smith,Armstrong & Barnewall,Samuel March,Bernard Hart, Alexander Zuntz, Andrew D. Barclay ,Sutton & Hardy ,Benjamin Seixas, John Henry, John A. Hardenbrook ,Samuel Beebe ,Benjamin Winthrop, John Ferrers, Ephraim Hart ,Isaac M. Gomez ,Julian McEvers ,Augustine H. Lawrence ,G. N. Bleecker ,John Bush ,Peter Anspach ,Charles McEvers Jr,David Reedy ,Robinson & Hartshorne
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2-13-2009 @ 2:53PM
LORY said...
What is the modifaction program? I called my mortgage company after we got behind due to my husbands hours being cut and they told me that all they could do was take my mortgage payment and split it into two payments on my next mortgage date. So now my mortgage for this month is almost twice the original. Any ideas how to handle this bull
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2-13-2009 @ 11:57AM
Glue said...
Forget about this, there is nothing out there to help. the freaking
banker, mortgage underwritten just want the home owner to go to hell.
If somebody has job or doesn't have pay cut. they won't rely on overspending in there credit card to maintain their daily expenses,
and end up stuck in high debt.
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2-13-2009 @ 11:57AM
Lita Epstein said...
Lory,
I wrote about agencies you can contact for help in this blog:
http://www.walletpop.com/blog/2008/11/18/dont-use-mitigation-services-to-save-your-house/
Lita
Reply
3-24-2009 @ 1:38PM
lead said...
why would the bank refinance you and lose out on money is what you are asking, if you can pay 7%, they are going to take it, lol. They dont refi you because you dont show you need it...........they are not going to do it out of just having a good heart......its about money.
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3-24-2009 @ 1:39PM
lead said...
lory do you mean modification program/ if so, its the mortgage is redone to what the value of your home actually is. if its worth 150k and your mortage is 200k now, its 50k written off and you pay a 150k mortgage. why pay on a 200k mortgage if home is only worth 150k, right? contact HUD's hope for homeowners program, not hope but hope for homeowners from HUD
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4-03-2009 @ 7:53PM
George said...
If any "slapping" should be done, it should have started about 8 years ago when the American public blindly gave their faith to a complete idiot by the name of George W. Bush. If anyone is to blame for the mess we are currently in, it should be W and the Republican rule we have been under the last 8 years. Point your finger inward sir!
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4-11-2009 @ 3:08PM
James Hamby said...
Actually, if you want to blame anyone for the housing problem, you should blame all the poor people and people who don't deserve to own a home. Also, the people who could afford to buy a home and decided to buy something that was much more than they could afford.
This has nothing to do with the government, it's because everyone has this stupid notion that they deserve to own a home when the truth is they don't. Instead of accepting this fact, they found a lender who was greedy enough to take their money and left them with a loan they can't afford.
If you can't afford a home but want one, TOO BAD. If you want a bigger home than you can afford, TOO BAD. Everyone deserves exactly what they're getting. Take your medicine and shut the hell up. I hope you all end up homeless, begging for food and sleeping in a carboard box, because that's where you deserve to live for your bad decisions.
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