FHA Protects Borrower from Themselves

Just because you can refinance doesn’t mean you should refinance. 

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In the last few years, more borrowers have been refinancing their FHA mortgages to extract cash from their home equity.  This is a worrying trend, since massive cash out refinances preceded the 2009 housing market crash, leaving many homeowners trapped in unsustainable mortgage payments.  In an effort to protect homeowners from themselves and from predatory lenders, the Department of Housing and Urban development is taking a step to reduce the homeowner as well as  lender risk from increasing home equity liquidation.

As of September 1, 2019, the maximum loan to value (amount of mortgage compared to current opinion of fair market value of your home) will drop from 85 percent to 80 percent.  This should help borrowers maintain some home equity, which is a major factor in measuring wealth.  Prior to 2009, the cash out refinance cap had been at 95 percent of home value.

Ginnie Mae is also concerned with rising refinances and the loss of home equity for Veterans and their families.  Veterans have been targeted by many lenders for mortgage loan churning, the practice of repeatedly refinancing existing loans for profit of the loan originators, but which yield minimal benefit to the veterans refinancing.  Over frequently refinancing your home can use up the equity in the home to pay for mortgage loan closing costs.  Churning veteran loans also raises the cost of guaranteeing those loans due to the early payoff, a cost that is being passed along to taxpayers.  To curtail this activity, Ginnie Mae has capped the refinance loans it will accept at 90 percent loan to value.    

Refinancing can be an important flexibility tool especially when a homeowner has a home improvement project or other goal in mind.  Refinancing to spend the money on unnecessary stuff can lead to bigger problems down the road.  If you want to learn whether refinance is a healthy way to save you money come see us at https://homerefinetwork.com and tell us about your needs.  Ask us anything, we love questions.