In spite of low rates, many homeowners haven’t refinanced the mortgages on their homes for various reasons. I have some suggestions regarding the steps they can take towards refinancing- if not immediately, at least in the near future.
The first thing that lenders consider whether you’re buying or refinancing is your credit rating. For a good interest rate, you need at least 740 as your credit score. If it’s lower than this, you might not get very good rates and fees.
When your credit score doesn’t allow a conventional refinance, you could apply at the FHA (Federal Housing Administration). This has a significantly lower requirement of credit scores as compared to other lenders.
No available equity
Many homeowners haven’t been able to recover equity they lost when home prices fell. In the past, lower equity indicated lower bargaining power for refinances. Today, under certain conditions, such homeowners might have an advantage.
There are certain programs from the government like HARP (Home Affordable Refinance Program) which are specifically designed to enable homeowners who are underwater to get refinance. To qualify for some programs, there aren’t any underwater restrictions. Some lenders, however, participate at different levels.
At the time of home purchase, if you made lower than 20% down payment, you must be paying a mortgage-insurance policy. It’s not technically true that you cannot refinance due to mortgage insurance, even though you’ve been told so. You can, but it will be more difficult.
Whether or not you have mortgage insurance, you could be eligible for HARP. When the original loan didn’t have mortgage insurance, the new loan will not need it as well – even though the loan-value ratio is over 80%.
If you do have a mortgage insurance policy on an existing loan, the new one must have the same cover. Mortgage insurers are reluctant to create new policies for HARP refinances. You need to stay with your current policy and lender.
High debt-income ratio
If you have too many debts and the debt ratio is very high as compared to your income, you may be reluctant to pursue a refinance.
The only solution is to try to increase your income and payoff your debts at the earliest.
Lower appraisals can upset the refinance process almost as much as high debt loads. While you can challenge a low appraisal, the best thing to do is to try renegotiating the deal. Alternatively, you could agree to pay extra to compensate for the low value or request for another appraisal.
The age factor
Age often plays a crucial role in refinancing decisions. If you’re nearing retirement, you may not think that it’s worthwhile to refinance. Older homeowners often opt for shorter-tenure loans when they refinance. This enables them to finish off with their loans by retirement time.
If you plan to invest extra savings towards your retirement, refinancing might be a good decision, especially when the investment is used to pay off the complete mortgage later. Of course, this decision depends on your savings and retirement goals.
Lack of affordability
Since refinancing costs money, you might think that without substantial savings, you cannot afford the costs involved. This doesn’t imply that you should give up on your refinancing goal.
In return for lower or no closing costs, lenders do refinance loans at slightly higher rates of interest.
Home Loan Advisor can analyze your property, current market conditions, local market comps, and other variables in our proprietary algorithm as well as match you with potential lenders! To assist you in the refinancing process, you can get a free home value report from Neighborhood IQ and find out what your home is really worth.