Mortgage interest rates are still low, a great relief to first-time home buyers, real estate investors, and households considering refinancing their higher-rate loans initiated over the past few years. Banks aren’t too eager to hand those low-rate mortgages out to everyone who wants them, however. If you read financial media, you’ve probably heard that this is a great time to refinance your mortgage. After all, you could save thousands of dollars by turning a loan with a 6 percent rate into one with a 3.5 percent rate.
The government has put into place programs to help households that are struggling with their mortgages due to the real estate market crash and the resulting home values. Those deeply underwater or behind on their payments can take advantage — or can try to take advantage — of the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP), though even borrowers who qualify have had difficulty working with their lenders. It seems like banks aren’t interested in reducing their profits from mortgages.
For a long time, financial experts have recommended fixed rate mortgages over adjustable rate mortgages. The predictability is important. With an ARM, borrowers are exposed to a significant amount of risk. If mortgage rates go up, higher interest payments down the road can destroy a family’s cash flow. When interest rates were higher, there was risk that an adjustable rate mortgage, offering a rate slightly lower than fixed rate mortgages, would shoot up in the future.
The credit crunch shrank interest rates significantly to the dismay of millions of borrowers who followed the advice of professionals or saw the risk without external influence. Now, many borrowers are stuck with long-term interest rates of 6 percent or higher. Those who don’t qualify for assistance through the government programs — those who have diligently met their financial obligations and who might not be underwater enough to get into a debate with their lender — are finding it difficult to obtain refinancing.
A recent feature on CNN Money illustrates this difficulty, which is likely more representative of the financial industry than the impression the industry provides for itself, that anyone can refinance a loan to access low rates.
No one can predict the future. When interest rates are at 6 percent and the real estate market seems to be booming, the average interest rates in five years may be 12 percent and it may be 3 percent. Those who locked in a rate of 6 percent expecting it to be low received the benefit of a predictable loan. There should be no surprise that many borrowers with good credit are finding resistance from banks to refinancing today. The banks don’t necessarily still own the mortgages, but they’re counting on the revenue they expected to earn from borrowers when the banks offered the fixed rate mortgages to the borrowers. Banks aren’t going to willingly or easily sign off on a reduction to their revenue.
Here is how one borrower described her family’s situation:
The Candelas have tried several times to reduce the almost 6% rate they’re paying on their mortgage.
Twice they attempted to refinance, in 2009 and 2010, but their home’s value had fallen by so much — from $650,000 to $423,000 — that the bank denied their requests.
“To say that we’re frustrated would be an understatement,” said Leigh Candelas, who is a stay-at-home mom. “We’ve never been late on our mortgage payments and naively went through the refi process twice only to pay the appraisal fees for no reason.”
This is the risk inherent in borrowing money to buy any asset. There’s always a chance that the asset you buy loses value. I do feel bad for borrowers who have seen the market value of their houses decline and are now underwater, but if you take a 30 year loan and plan to wait the entire term of 30 years to pay off the balance to fully take advantage of leverage, you should accept the risk that comes with it. If you can find a bank willing to negotiate with you in the middle of the loan, then it’s a bonus, but there’s no reason to expect any lender to be sympathetic. There are times when refinancing is profitable for banks, and lenders might be willing to work borrowers at that time, but that is a luxury, not an expectation.
It can be frustrating to be trapped in a 6 percent mortgage when new loans are priced around 3.5 percent. It’s the same feeling you get when you bought your home for $500,000 and your new neighbors in a similar house just moved in, paying $250,000. It’s demoralizing to feel like a sucker, like everyone else was able to get a deal that wasn’t extended to you. If like most Americans you can’t or won’t pay for a house with a 100 percent down payment, these are the risks you have to live with. Even by paying a house with cash, the house could lose value later, but at least you don’t have to deal with lenders.
I’m not particularly sympathetic for borrowers having difficulty finding refinancing options. There’s no reason to expect a bank to adjust the interest rate when the borrower was of sound mind when choosing the fixed rate mortgage to benefit from the reduced interest rate risk. I am sympathetic in some cases, after all, there are many external circumstances that can make life difficult while trapped in a mortgage, but not when borrowers without cause expect banks to act against their own profits.
How freely should banks offer refinancing to borrowers who don’t qualify for the government-directed programs like HAMP and HARP?
Published or updated September 3, 2012.