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10 reasons you haven’t refinanced (and how you can change that)

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Mortgage rates have been setting records for what seems like years now. Interest rates at 60-year lows have allowed millions to refinance. Rates have fallen consistently for so long that many homeowners have refinanced their mortgages more than once.

However, there are still countless homeowners who haven’t refinanced for one reason or another. Here are 10 reasons why homeowners aren’t refinancing and what they can do to refinance if not now then in the near future:

Whether you’re refinancing or buying, one of the first attributes mortgage lenders will focus on will be your credit score. To lock in the best rate for your refinance you’ll need a credit score of at least 740. If your score isn’t that high, a refinance might be within reach, but the rates and fees won’t be as good.

What you can do about it: If your credit score puts you out of the running for a conventional refinance, you can still try your luck with the FHA, which currently has a minimum credit score requirement of only 580 for the loans they insure (lenders typically add “overlays,” which can increase the requirement to 620). However, if you’re targeting the FHA you want to act quickly: recent changes, and other changes expected to come this year, will make FHA loans more expensive and harder to get.

For more information, read: 5 quick ways to boost your credit score

While the housing crash began about six years ago, the effects are still fresh in the minds of homeowners nationwide. Countless homeowners still have not recovered their equity that was lost when home prices tanked. While traditionally, a lack of equity presented refinancers with little bargaining power, the truth is that today homeowners with little or no equity may have an advantage.

What you can do about it: Programs like the government’s Home Affordable Refinance Program (HARP) have been specifically designed to help underwater homeowners refinance their mortgages. The expansion of HARP means there are no underwater restrictions to qualify. However, different lenders have different levels of participation. If your lender will only refinance loans as high as, say, 115 percent, shop around to find a lender that is willing to refinance your mortgage, no matter how far underwater you are.

For more information, read: HARP 2.0: Your 5 steps to approval

If you put less than 20 percent down when you bought your home, you’re paying a lender’s mortgage insurance policy. Given recent depreciation in home values, chances are pretty good that you’re still paying for the policy and will be for some time to come. If you’ve been told that you can’t refinance because of mortgage insurance, that’s technically not true. However, refinancing will be more difficult. 

What you can do about it: You can qualify for HARP whether you have mortgage insurance or not. If your original loan did not require mortgage insurance, your new loan won’t either, even if its loan-to-value ratio exceeds 80 percent (or even 100 percent). However, if your current loan has mortgage insurance, your new one has to have the same amount of coverage, and that’s where the problem usually lies. Mortgage insurers don’t want to take on this risk, so they will be reluctant to write new policies on HARP refinances. You have to keep your current policy, which means you have to use your current lender. Not all lenders participate in the program or have the incentive to give you a lower rate.

For more information, read: Mortgage insurance puts roadblock on road to refinancing

The last few years have been tough on everyone, homeowners especially. For many, keeping the mortgage current and the house in order has meant a greater reliance on credit cards. If your debts have piled up to the point where the ratio of your debts compared with your income is too high, you may have already been rejected for a refinance or are simply reluctant to pursue one.

What you can do about it: While high levels of debt are sure to keep you from a refinance, you do have two options; unfortunately, neither one will turn things around immediately.  First, you can earn more money (easier said than done). Or, the more realistic approach would be to start consolidating and paying down your debts as soon as possible.

For more information, read: How to jump over 3 refinance hurdles

So, you were all set to refinance until your appraisal came in lower than expected. A low appraisal can derail a refinance just as fast as a high debt load. Just because the appraisal came in lower than you expected doesn’t mean the valuation of your property was inaccurate. It does mean, however, that your lender may no longer approve the loan.

What you can do about it: While you can certainly challenge your low appraisal, your best option may be to renegotiate the deal. Other options include paying extra to make up for the lower value or even request a second appraisal.

For more information, read: How to challenge that low appraisal

Age is nothing but a number, right? Well, when it comes to refinancing, age can play an important role in your decision. If you’re retired or closing in on retirement, you may think a refinance isn’t worth it because of your age. But like most mortgage decisions, it comes down to what is best for your own personal situation—there’s no one-answer-fits-all.

What you can do about it: Many older homeowners choose shorter-term loans when they decide to refinance. The shorter term allows them to pay off their loan by the time they retire or soon after. Or, if retirement savings are at a minimum, you may wish to refinance into a new 30-year term.

“If you intend to invest the extra savings for your retirement, this could be a good move, especially if you use the investment to pay off your mortgage in full at a later date," says Joseph Adkins, CEO of Global Asset Management Group in Altamonte Springs, Fla. But again, this decision really revolves around your savings and your goals for retirement.

For more information, read: Retire with your mortgage or refinance?

If you were forced to take a lower-paying job after being laid off, you may think that your lower income status will prevent you from refinancing. A general requirement to qualify for a refinance is that your loan is current. So even if you’re making less money than you used to but you’ve managed to keep current on your home loan, you’re in luck.

What you can do about it: The expanded HARP 2.0 program no longer requires proof of income—simply proof that you’re employed and you’ve been making your mortgage payments on time. This streamlined opportunity is available to homeowners with Fannie or Freddie-guaranteed loans at 80 percent LTV or higher.

For more information, read: HARP: What’s it about, why it failed and why it’s changing

Refinancing isn’t cheap. Typical refinance fees will run you about 2 percent of your loan amount. If you don’t have a few thousand dollars saved to pay for refinance costs (closing costs, appraisal fees, credit checks and more) it doesn’t mean you should abandon your goal of refinancing your mortgage.

What you can do about it: You know what they say: nothing in life is free. Even if something is advertised as “free,” there’s usually some cost involved. The same goes for mortgages and what’s known as a “no-cost” refinance. In exchange for paying lower or no closing costs, your lender will refinance your loan to a slightly higher interest rate. Mortgage lenders make up for not charging you closing costs by making a little more in interest each month.

Refinance calculator: What’s the best way to finance my refinance?

Just as your credit score and home value are essential pieces to any refinance approval, so is the ability to properly document your income and assets. In addition to other paperwork, mortgage lenders will ask to see pay stubs, asset statements, documentation of deposits and tax forms.

What you can do about it: If you simply run a cash business and have no way to properly document your income, a refinance is most likely out of reach. However, if you’re self-employed you still have options. Lenders want to see a consistent pattern of income. Unless you have two years of history as a self-employed person, you will not get to use your income for mortgage qualification purposes at all, explains loan officer Dan Green, author of TheMortgageReports.com. The self-employed include business owners, persons owning more than 25 percent in an entity and W-2 employees whose salary is more than 25 percent bonus or commission, he explains.

For more information, read: Refinancing? Use this document checklist

We’ve yet to track down one homeowner who considered their refinance experience fun and easy. Given today’s strict lending environment and the seemingly endless paperwork associated with getting a new loan, many homeowners have simply decided the refinance process isn’t worth their time.  Or, perhaps your loan amount is relatively small or you don’t have many years left on your loan.

What you can do about it: If the refinance process appears too daunting, look into which streamline programs are available to you. Before you flat out decide against a refinance, research streamline programs—a simpler and quicker refinance could make you change your mind.

For more information, read: FHA streamline refinance: Does your home pass the test?

(All images courtesy of iStockphoto)

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About the author:
Tim Manni is the Managing Editor of HSH.com and the author of the site's daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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