Refinancing is Still Alive

New home construction is down; the inventory of vacant homes for sale is up. As more and more houses stay on the market longer and longer, prices will invariably begin to drop. The housing bubble has clearly burst. But with interest rates continuing to rise and the Federal Reserve tightening the belt on credit across the board (especially for subprime loans), the slowdown doesn't look as though it will turn into a buyers’ frenzy anytime soon. However, the standard market influences of supply and demand are still very much in effect. Mortgages are still being written, and many homeowners are still in the market to refinance. As a matter of fact, some will be absolutely frantic to do so.

This year, roughly one trillion dollars of adjustable-rate mortgages (ARMs) are set to adjust -- upward. Many of these mortgages have been made to subprime borrowers, those who because of credit issues or too little credit could not qualify for the best rates that lenders offered. An abundance of these ARMs are of the 2/28 variety; these mortgages offer interest rates that are typically 2- to 2 ½% above market rates for the first two years of the loan. This allows the credit-challenged borrower an opportunity to qualify for the loan at a more affordable payment. At the beginning of the third year of the loan, the interest rate adjusts and remains at the new rate for the remaining 28 years. Unfortunately, this new rate could be (and with the current steady rise in interest rates, very likely would be) substantially higher than prevailing market rates. This could serve to make monthly payments somewhat prohibitive.

These circumstances would seem to be poised to fuel the continuation of refinancing in this country, although possibly not at the levels of recent years. One of the main advantages of the 2/28 ARM is that it permits the homeowner to develop a track record of positive mortgage payments, thus boosting his or her credit rating with the hope of refinancing to a lower fixed-rate mortgage before the ARM's adjustment period. Though banks have been directed to tighten their credit purse strings by stiffening their loan qualification criteria somewhat, as long as homeowners have done their part by paying their mortgages on time, it's likely that they'll have very little trouble finding a lender to accommodate their wishes.

Viewed from a slightly different angle, many of these homeowners are absolutely going to need to refinance out of their ARMs. Once the rate adjustments are made, a large number of these loans may simply no longer be affordable for them. If the borrowers have wisely used their time and opportunities to establish a positive credit history, this should be a benefit to them. Although some may not yet be able to qualify for a prime-rate mortgage, they should still be able to obtain a much more advantageous fixed rate than the possibly nightmarish adjusted rate which looms on the horizon. Clearly, at least for the foreseeable future, the refinance market will continue to have plenty of business to handle.

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