"Refi Fever" has again swept across the land, and record numbers of homeowners are rushing to refinance and capture extra low interest rates. But many get turned away because of jumbo mortgages or low credit scores.

For the first time since 2005, mortgage rates have slipped significantly below 6 percent. The low rates provide homeowners with a welcome opportunity to refinance their mortgages, and save money on monthly payments, as well as over the lifetime of their loans. This time around, however, refinancing is somewhat easier said than done, because lenders are becoming increasingly conservative and investors are staying away from funding subprime and jumbo mortgages. That means that many of the prime candidates for refinancing are knocked out of the game before they get to first base.

A jumbo headache

 

In the past, subprime borrowers were first in line when the chance came to refinance to a better rate, because they're charged higher rates due to their poor credit. But at least for the foreseeable future, those loans have gone the way of the T-Rex, becoming virtually extinct. Another group of people who usually leads the charge to refinance are those with large jumbo loans (mortgages exceeding $417,000). These are unconventional, meaning that they don't meet the guidelines of government-backed loans, like those provided by Fannie Mae and Freddie Mac. They need private investment capital, and the world of private lending is in shambles thanks to unprecedented losses precipitated by the subprime crisis. While it's still possible to get a jumbo, it doesn't make financial sense to refinance into one nowadays, because rates are still high. In other words, jumbo rates have remained jumbo, despite plummeting conventional mortgage rates.

As a result, on both ends of the mortgage price spectrum, homeowners are being rejected when they try to refinance. Those left constitute the mortgage "middle class"-borrowers with good credit who want to refinance a moderately sized conventional conforming loan. But since credit is tight and underwriting guidelines are tough, many of these potential borrowers are also being denied. Those who do qualify are paying higher fees for the privilege of getting refinanced.

Refinance fever

 

The Mortgage Bankers Association reports that weekly mortgage applications recently surged to a level not seen since spring 2004. "Refi Fever" was responsible for more than half of all mortgage applications. But applying for a loan, and getting one funded, are two different animals. Along the way, many homeowners meet with the disappointment of rejection. To capture the attractive rates that have everyone celebrating, a consumer needs to have a credit score of at least 680, or equity exceeding 30 percent. Those who miss the mark can expect to pay up to 2 percent more, and the biggest premiums are levied against those with scores under 620.

The historically low refinance rates are, in a nutshell, reserved for an elite group of preferred customers.