Q: I’d like to refinance my mortgage while interest rates are at a historical low. The problem is I’m unemployed.
I have an adjustable rate mortgage (ARM) for about $85,000. The interest rate on that loan is currently at 4.125 and the loan is scheduled to adjust in June.
I just lost my job in December. I used to earn $56,000. Now I get $387 per week in unemployment compensation.
The thing is I have a stock portfolio worth about $150,000 and a savings account with $50,000 in cash.
A local mortgage guy said I wouldn’t be approved because I’m unemployed. That seems ridiculous to me. Is income the only factor they consider?
C’mon, I could pay off the loan and still have a six-figure portfolio. What rare percentage of people does that put me in a group with?
A: A few years ago, you’d probably get approved on the strength of the assets in your bank account. Today, that simply isn’t enough because the credit crisis has forced lenders to tighten their credit requirements.
Why isn’t your $150,000 stock portfolio enough? It might help, if the cash was in a brokerage account in a cash-like security. But if your $150,000 stock portfolio is in a 401(k) or other qualified retirement account, lenders will consider it untouchable – which it would be if you defaulted on the mortgage. You’d have to choose to liquidate it.
Lender’s want to see the income flow into a household and want to make sure that income is sufficient to pay the monthly expenses of owning a home.
Even if your cash was in a simple brokerage account, we’ve recently seen the stock market plunge and then recover. That’s a risky investment and today’s lenders are all about shedding risk for something more stable.
As for your available cash, it’s not enough to pay off your loan. Even if you drained it dry, you’d still come up short.
The bad news for you, and the millions of other homeowners who have been laid off in this recession, is you cannot refinance unless you have some sort of job. Your unemployment income will count but only if you have more than nine months left on it. And, not every lender will allow you to qualify based on unemployment.
The good news is that interest rates should stay low for awhile, and you may find that loan may actually adjust down when it adjusts in June. If your loan adjustment period lasts one year, your new lower rate will take you until June 2011. That would buy you another year to find a job and then refinance.
But, with the amount you owe on the loan, you might think twice about refinancing. You might find that keeping the loan on a year-to-year basis may be better for you than paying the fees and costs to refinance your loan.
Many variable interest rate loans have an initial period in which the interest rate is fixed on the loan. At the end of the initial period the interest rate can change. That change will depend on where interest rates are at the time of the adjustment.
There are two interest rates that lender’s use to determine mortgage interest rates: one rate is the one year Treasury interest rate and the other is the one year LIBOR (London Inter Bank Offered Rate).
Both of these rates are at about one percent. To get your actual interest rate, you would need to add the Treasury rate or LIBOR rate to the margin on your loan. Many loans have a margin of between 2.25 to 3.5 percent. Assuming your margin was 3 percent and the LIBOR rate was 1 percent in June; your new interest rate on your loan for another year would be about 4 percent, or a bit lower than where you are now.
In addition, most variable rate loans have certain caps and minimums for increases. A common cap on a variable interest rate loan is that the interest rate on a loan can’t change at any given interest rate change period by more than 2 percent and the lifetime increase on a variable rate loan can’t be greater than 6 percent higher than your initial interest rate.
In your case, if your initial rate was 4.125 percent, your interest rate could not go higher than 6.125 percent on the first change date and could never be higher than 10.125 percent.
While that’s high, it’s also the outer edge of what might happen, and interest rates would have to skyrocket for you to get there. I don’t think interest rates will go up that much over the next few years.
I hope by 2011, the unemployment part of the recession has peaked and you (and so many others) can find a good-paying job and resume your life.