If, that is, you can even qualify for one. If your credit score is impeccable and you can document your income. If you still have enough home equity to refinance or enough cash to make a down payment. And if you can stomach the chance that home prices may keep dropping through 2008.
What to make of what's going on? The nation is in the middle of a Mortgage Mess, in capital letters, and at the same time, interest rates are at four-year lows, in the mid-5 percent range.
Moreover, Congress is moving to ensure as many people as possible in expensive housing markets such as Massachusetts enjoy the lowest possible interest rates. Many homeowners with jumbo loans, or buyers who are going to borrow more than $417,000 to buy a house, would be due for a big rate cut under legislation included in the economic stimulus package moving through Washington, D.C.
It sounds good, but borrowers need to know that there are a host of new obstacles they now must clear to get a mortgage. This time, you will really have to prove you earn what you claim. Your credit history is more crucial. Borrowers with credit problems may need to make at least a 30 percent down payment to avoid paying more. And, maybe most crucial here in the Boston area, some buyers in real estate markets where prices are falling will need to make an additional 5 percent down payment; those refinancing will be able to borrow 5 percent less.
One ray of sunshine: Congress is also considering allowing more borrowers to qualify for a Federal Housing Administration loan. The FHA program offers loans at low interest rates to people with little cash for a down payment, or income and credit problems that prevent them from qualifying for a conventional mortgage loan.
With these fronts pushing against each other, the forecast, to Peter Milewski, director of the mortgage insurance fund at the quasi-public agency MassHousing, "is not totally sunny, and it's not rainy. It's somewhere in between."
So, here's what you need to know.
Making mortgage math work
It makes more sense than ever to clean house - your financial house. This can take a lot of time and a little money, particularly if you have to dispute any information in your credit history.
Get your credit reports from all the major providers - available for free at annualcreditreport.com - and make sure they don't contain incorrect information, such as a credit card you closed or debts belonging to someone else with a similar name. Then address any problems, such as paying delinquent bills. You can also pay to check your credit score. Anything above 680 should get you a mortgage; 720 and higher gets you better deals.
These tips come courtesy of Daniel J. Galli, a certified financial planner in Norwell, who said that with lenders putting a higher emphasis on borrowers' creditworthiness these days, it's worth the hassle to get your reports as clean as possible.
"It's got to be done in writing," he said. "It's certainly something you can do. It's not as crazy as people make it out to be, but not as easy as picking up the phone and saying, 'Hey, this is wrong.' "
If after all that work, your credit is, er, not great, be prepared to pay more for a loan.
Happily, some of these borrowers may soon have a better option. With the push of US Representative Barney Frank, chairman of the House Committee on Financial Services and colleague Representative Michael Capuano of Somerville, the economic stimulus package contains a provision that would let the FHA insure loans as large as $538,683 in Greater Boston, $385,000 in the Worcester area, and $416,250 in New Bedford-Fall River. Those loans, which carry interest rates almost as low as conventional loans, would be large enough to purchase most homes in those communities.
FHA borrowers pay a small insurance premium, but the program requires only 3 percent down payments. Borrowers also must have a steady job, be able to verify income, have a decent record of bill paying, and not a lot of other debt. The FHA also does not want borrowers' monthly mortgage payments to be greater than 31 percent of their gross income.
Taking some loans out of the jumbo category could have a huge effect on borrowers in Massachusetts and other expensive real estate markets. The stimulus package would allow Fannie and Freddie to raise borrowing ceilings for conventional loans, to 125 percent of the median home price in high-cost markets. In Metro Boston and the North Shore, that would be as much as $538,683, according to estimates by Representative Frank's committee; on Nantucket and Martha's Vineyard, the maximum would jump to $542,580. In 2006, there were 11,450 home loans in Massachusetts between the current $417,000 threshold and the proposed $538,638. The higher threshold, as well as the expanded FHA limit, is supposed to be only temporary, through the end of this year.
Conventional loans are significantly cheaper than jumbo loans. A Boston area homeowner who took out a jumbo $525,000 loan at 6.3 percent a year ago, for example, may be able to refinance into a conforming loan under the new limits. At today's prevailing rates, that would cut monthly payments by around $250.
Beyond the refinancing benefits, Milewski of MassHousing said the change should help owners of higher-priced homes to sell their properties by increasing the spending power of buyers - lower interest rates mean people can borrow more money.
However, he also cautioned an expanded pool of Fannie and Freddie-eligible customers could lead to higher rates for all borrowers. How? The agencies, Milewski said, would have to increase their own borrowings to finance the increased mortgage demand, borrowings that would likely come at higher rates simply because of the limited supply of money. Those costs would be passed onto consumers.
Lenders are also reacting to falling home prices. They're scared that the value of homes will drop below the amounts of loans, and that the owners will stop making payments. Fannie Mae is adding a 5 percent buffer on loans in markets where it believes prices are falling - such as much of Eastern Massachusetts. It will require an additional 5 percent down payment from many homebuyers. Those looking to refinance would be able to borrow 5 percent less.
Milewski said the new rules would in particular affect "those who had refinanced to the max or who had purchased homes with little or no money." The higher funding requirements are an echo of what used to be standard borrowing practices a generation or two ago. But housing today is more expensive; an additional 5 percent on a $300,000 loan, Milewski pointed out, is $15,000.
"That will take a lot of homeowners out of the market," said Milewski.
The final question about is how quickly your lower monthly payment will cover the cost of refinancing. The simplest analysis is to divide the monthly mortgage savings into the total refinance cost. For example, if you cut monthly payments by $200 and the closing costs on the loan were $4,800, your payback period is 24 months. If you're going to be in the house more than two years from now, the refinancing makes sense.
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