Prepare Well in Advance of Signing That Refi-Application
Five Secrets to Successful Refinancing
Bonfiglio Asterita Law
If you are tempted to refinance your mortgage in order to get a lower rate or a shorter term, you should know, it’s a complicated process. Not everyone is in a good position to refi, though if you succeed, it can be well worth the effort.
By refinancing at a lower rate you could dramatically decrease your mortgage payment. If you currently have an adjustable mortgage, refinancing could allow you to lock in a long-term low rate. This could offer you much-needed financial relief, freeing up some cash to pay off debts or invest in your retirement accounts.
to refinance, only to discover they can’t get approved. Plus, some mortgages options that once were offered have now disappeared and certain others have cropped up in their places.
In spite of the potential drawbacks, it’s certainly worth checking into your potential for refinancing success. Here are some secrets you should know that will help you determine, or increase, your chances of getting a better loan.
Secret #1: Bump Up Your Credit Worthiness
Your credit (or FICO) score will determine whether or not you get the lowest rate on your refinancing loan. Generally, to get the best rates, you’ll need a FICO score of 740 or higher. If yours falls between 620 and 740, you’ll have to pay higher interest rates or fees. And… if your score is below 620 you may not be approved for a loan at all.
To make things more difficult, the three major U.S. credit bureaus (TransUnion, Equifax and Experian) all calculate FICO ratings differently. Typically, a lender will take a look at credit reports from all three bureaus and choose the score that falls in the middle.
While Experian doesn’t make its credit reports available to the public, you can visit MyFico.com to purchase your TransUnion and Equifax FICO reports. Keep in mind that these scores may be different from the ones your lender sees. However, because all FICO scores are fairly consistent, it will give you a good idea about where you stand.
You should know, it is possible to legitimately raise your credit score, but it takes time. Start months before you plan to refinance. (See right-hand box.)
Secret #2: Know What Your House is Worth
Before you head down the refinancing road, do your homework and figure out your home’s current value. Don’t assume your house is worth whatever you paid for it. Home values are affected by numerous factors specific to your geographic area as well as to the national economy, so knowing is far preferable to guessing.
A local real-estate agent may be able to provide information on recent sales of similar homes in your neighborhood. You could pay an appraiser for a professional opinion of your home’s value. The problem with this is, an appraisal will likely cost between $300 and $500 (depending on where you live) and as part of the refi-process you will have to pay again for an appraisal ordered by the bank.
Another point, appraisers often use foreclosure sales, short sales and other distressed home sales in your area to calculate your home’s value. Even if you are not approved for the refinance loan, you’ll still have to pay the appraisal bill. This is all the more reason to do your research and calculate your home’s value on your own.
Secret #3: Have Some Equity
You are much more likely to be approved for a loan if you have some equity in your home. If your current mortgage is less than 80 percent the value of your home, refinancing shouldn’t be a problem.
However, you may have another refinancing option if your mortgage is for between 80 percent and 105 percent of your home value and your loan was bought by Fannie Mae or Freddie Mac. If you fall into this category and are current on your loan payments, you may be able to refinance under a new government program called “Making Home Affordable.” Visit http://makinghomeaffordable.gov/ to learn more about this program and find out if you qualify.
Secret #4: Prepare for Second Mortgage Challenges
If you have a second mortgage on the home you’re trying to refinance, you may encounter some additional challenges. These days, some lenders are refusing to stay in second place if you try to refinance your first mortgage.
If your second lender resists, you have a few options. You can pay off your second loan, roll the two loans together if you have enough equity or find a new second lender who will allow you to refinance your first mortgage.
Secret #5: Don’t Go Backwards
If you are refinancing your mortgage, your goal is to shorten your loan — not make it longer. The only time it may make sense to start over with a 30-year mortgage is if your current mortgage is only one to four years old and the new rate will greatly reduce your payments. For the most part though, try to avoid going backward. Consider a 15 or 20-year mortgage-this will decrease your future interest payments and allow you to pay off your house more quickly.
It’s clear that refinancing a home is no easy task. As you head down the refinancing road, you may be surprised at how much documentation you’ll need to provide. Many lenders are asking for pay stubs, bank statements, brokerage statements and even tax returns to ensure you are a low risk. While it may be a tough process, you will reap the benefits if you are successful.