Rates are falling. Time to refi?

This week's abrupt drop in mortgage rates will provide an opportunity for some borrowers to refinance. But a large-scale refinancing boom is unlikely.# A good candidate for a refinance is a homeowner who: has good credit;
# owns a house that is worth substantially more than the outstanding debt on it;
# earns enough to repay the loan and can prove it;
# isn't overburdened by student, auto and credit card debt;
# has enough cash to pay the closing costs.

In other words, today's refinancer looks more like a typical mortgage borrower in the 1990s than a typical borrower during the go-go period of roughly 2001 to 2006, when the primary qualification to get a home loan was the ability to fog a mirror. Lending standards are more strict now, and the tighter guidelines will prevent a lot of people from refinancing, even if they want to. "The issue to actually pulling the trigger and getting the mortgage done is less a matter of rates and more of qualification," says Cameron Findlay, chief economist for LendingTree.com.

A lot of today's would-be refinancers will find that they don't meet the qualifications. When homeowners got mortgages two years to five years ago, many of them:

* got away with exaggerating their incomes;
* had terrible credit histories;
* made no down payments or tiny down payments;
* overpaid for their houses.

Now they can't refinance because they don't really earn enough to qualify for a loan, or they owe more than the house is worth, or they still have low credit scores.

"We are seeing a big spike in loan calls," says Jeff Lazerson, president of MortgageGrader.com, an online lender. "Some formerly prime borrowers are now having credit score struggles. And the other big issue is lack of equity. So far, of every 10 potential borrowers we talk with, there are three that we can actually assist."

There's an old saying that if you have money and don't need a loan, the bank is willing to lend to you, and if you don't have money and need a loan, the bank will turn you away. A parallel situation exists in today's refinance market. Of the people who can qualify for a refinance, most of them probably don't need to.

Who can refinance
# Today, there are two groups of qualified borrowers who should look at refinancing: those who have fixed-rate mortgages above 6 percent;
# those who have adjustable-rate mortgages and want to flee to the security of a fixed-rate loan.

Most of the people in this group have hybrid ARMs with low introductory interest rates. If they refinance into fixed-rate loans at, say, 5.75 percent, their interest rates and monthly payments will go up. But with fixed-rate loans, they don't have to worry about future rate increases, whereas with adjustable-rate mortgages, the threat of future rate increases is always present.

In today's economic climate, people want the secure feeling of having a stable mortgage payment that comes with a fixed-rate loan, Lazerson says.

"The great news is that refinance clients are receiving significant emotional relief," he says, "getting out from under adjustable loans and high-rate seconds as well as lower interest rates and payments."