For the week ended Dec. 9, the average rate for 30-year fixed loans was 4.46%, according to Freddie Mac, up from 4.17% in early November Yet refinancing activity has continued to slump from its summer highs, according to the Mortgage Bankers Association.
Why aren’t more borrowers jumping on the refinance bandwagon? Some are discovering that relatively tiny medical debtsâ€”even mistaken onesâ€”can damage their credit scores, making refinancing less attractive. (See “Hidden Medical Debt Trips Up Homeowners,” Dec. 11.) For other homeowners looking to refinance, reduced credit limits are impeding their path.
In anticipation of the Credit Card Accountability, Responsibility and Disclosure Act passed last year, banks went on a credit pruning spree, cutting available credit lines on millions of borrowers, says Beverly Harzog of Cardratings.com, a consumer-education website. Last year, for example, American Express and J.P. Morgan Chase & Co. reduced credit lines for borrowers in areas hit hardest by the subprime mortgage collapse.
Reductions in available credit have a powerful impact on credit scores, says Ms. Harzog, causing them to plummet precipitously. Low credit scores can knock borrowers out of the refinancing race, as banks impose high closing costs on customers with less than pristine credit. Credit scores are partially determined by how much of available credit a borrower uses, otherwise called the “utilization rate.”
Even if borrowers are vigilant about paying their bills on time, they can still see their available credit slashed. In October, Bank of America reduced the available credit on Phillip Dampier’s card to $11,000 from more than $21,000 after the Rochester, N.Y., resident’s online payment wasn’t credited. While the bank later waived the late fee, it wouldn’t reinstate his original credit line. The 43-year-old Mr. Dampier was shocked when the reduction torpedoed his credit score by 76 points.
“It was like a one-two punch,” he says. He and his wife were thinking about refinancing their home, but don’t feel that they can now, given Mr. Dampier’s lowered credit score.
Jodi Przanowski, a 46-year-old customer-service supervisor, can’t refinance the mortgage on her Lake County, Ill., ranch house, because her debt-to-income ratio skyrocketed after issuers reduced the available credit on five of her cards. “Even though I’ve never paid late, it looks like I’ve maxed out my cards,” says Ms. Przanowski. In September, Best Buy reduced the available credit on her store card to $700 from $3,000. “It’s a huge drop, and now I can’t refinance my mortgage which is at 6%,” she says.
If homeowners are thinking about refinancing, they should pay close attention to their utilization rate. Pay down as much credit-card debt as you can, says Ms. Harzogâ€”but don’t permanently close out existing credit-card accounts, since that can also ding your credit score.
Lenders have gone too far in tightening credit standards, says Brian Wickert of Wisconsin-based Accunet Mortgage. “No one thinks that banks should dole out low rates to everyone,” he says, “but the underwriting process has gone too far in the opposite direction.”