It'll Soon Be Easier for Low-Income Homeowners to Refinance. Here's Why

A new program will make refinancing more attractive for lower-income borrowers.

Refinancing a mortgage is a great way to save money, but it isn't always a fit for everyone. Not only are there fees (known as closing costs) involved, but some people can't lower their interest rate enough to make those fees worth it. But beginning this summer, some low-income borrowers may be eligible to refinance their mortgages at a reduced interest rate and lower their monthly payments substantially in the process.

More options for lower earners

The Federal Housing Finance Agency (FHFA) announced that it's rolling out a new mortgage refinance product -- RefiNow -- designed for low-income borrowers with single-family mortgages backed by Fannie Mae and Freddie Mac. Under this program, lenders will have to ensure that borrowers who refinance save at least $50 on their monthly mortgage payments. They'll also need to guarantee at least a 50 basis point drop in borrowers' existing interest rates. In other words, if an applicant has an existing rate of 4% on a mortgage, this new program will want that borrower's interest rate to drop to at least 3.5%.

As part of the RefiNow program, the FHFA will also waive its adverse market fee for borrowers with mortgage balances at or below $300,000. That fee took effect on Dec. 1, 2020, and applies to mortgages with balances of $125,000 or more.

How to qualify for the new RefiNow program

As mentioned, this new refinance program is designed to help lower earners reap the benefits of refinancing. To qualify for it, borrowers must:

• Have an income at or below 80% of the area’s median income.
• Have been current on their mortgage payments for the last six months.
• Have no more than one missed payment over the last 12 months.
• Have a mortgage with a loan-to-value of 97% or less (meaning they must own at least 3% of their home outright, so a home worth $300,000 would have a mortgage of $291,000 or less).
• Have a debt-to-income ratio of 65% or less. (This measures a borrower's existing debt payments compared to their monthly income.)
• Have a credit score of at least 620 (the minimum credit score needed to qualify for a conventional mortgage).

The FHFA is aiming to make its new refinance product available to qualified borrowers as early as this summer, and it says that it could save borrowers an average of between $100 and $250 a month. As such, if you're a lower earner who's been on the fence about refinancing, it could pay to sit tight until the new RefiNow program opens up, and then jump on that opportunity once it becomes available.

Lowering your monthly mortgage payments could help make your household expenses easier to manage. Plus, if you refinance to a lower rate, you'll spend less money on interest in the course of repaying your home. That's money you can keep for yourself or use in other ways to better your total financial picture.