Source: Selected excerpts from Mass Banker Magazine Second Quarter Consumer Corner by Michael Scheilbach
If you’ve been in your home for a while, it may be time to consider refinancing with interest rates that are still very low. Although everything looks calm at the moment, interest rates will surely start moving upward at some point as the economy continues to recover. Here are a few tips for finding and qualifying for a low-cost mortgage loan:
- Repair Your Credit – Credit scores can make or break a loan application, so the first step is to review your latest credit report. Borrowers with a 740 or greater credit score generally are able to obtain most favorable rates. The exception is someone with otherwise good credit who misses a payment. Under the Fair Credit Reporting Act, borrowers are entitled to one free credit report from each of the three main credit bureaus – Equifax, Experian and TransUnion – every 12 months. You can request a free credit report at www.annualcreditreport.com.
- Shorten the Loan Term – If you have been paying a long-term, 30-year loan for a few years, you can maximize your savings by switching to a shorter-term mortgage, such as a 10- or 15-year loan. Your monthly payments may be higher but, if you can afford it, you could save thousands of dollars in interest in the years to come.
- Government Refinanced Loans – The Federal Home Affordable Refinance Program, or HARP, lets homeowners refinance up to 125 percent of the value of their home. The Federal Housing Administration’s “streamline” program lets homeowners refinance an existing loan that’s insured by the FHA with less paperwork. Some states have programs that offer refinance loans to help homeowners avoid foreclosure.
- Relationships Can Make a Difference – Even with the right credit, good job and solid financial situation, it still may be difficult to obtain a mortgage loan because of the lingering aftershock of the Great Recession. This is where having a good relationship with your bank is important. If you are even thinking about refinancing, a good first step would be to visit your local banker to explore the possibilities.
- Figure Your Break-Even Point – Rates are low, but refinancing is not for everyone. For people with fairly low rates, refinancing may not be advisable because of possible closing costs with the new loan. Even though your rate may drop from 5 percent to 4 percent, for example, the closing costs may negate your savings. Help on finding the break-even point can be found on a variety of mortgage-oriented websites with online calculators. A safe approach is to consider refinancing only if you can reduce your mortgage rate 0.5 percent or more from what you are currently paying.
- Understanding “No Closing Cost” Deals – It is important to recognize that all mortgage refinancing programs, even those billed as having no or low closing costs, involve some form of cost. Closing costs typically total about 1 percent of the mortgage’s principal, covering such things as home appraisals and lawyer’s fees. How these costs are paid varies. One of the preferred ways is simply to have the closing costs rolled into the new mortgage loan. This raises your monthly payment, but usually not significantly.
- Consider “Cash-In” Refinancing – As a result of the Great Recession, the housing market has been volatile. The problem in refinancing is that some homeowners have mortgages for more than their home’s value. To obtain a lower interest rate on a refinanced loan, they need to come up with cash to bring their equity up to 20 percent of the home’s value, which is the minimum that many refinancing deals require. The result can be a smaller mortgage at much more favorable rates.
- Get a Rate-Lock Confirmation – Ask if you can lock-in the interest rate that the lender first offered, even if you have to wait a while to complete the loan process. This rate lock should be guaranteed for at least 60 days.
- Give Your Lender a Chance – The last advice could also be the best advice if you are looking at refinancing because you are having problems paying your current mortgage. Very simply: Talk with your current lender. In many cases, your lender may be willing to work with you.