Monday, January 19, 2009

Time to Refinance?

Considering refinancing your mortgage, to take advantage of historically low interest rates, below 5%, in some cases?

As a first step, we recommend you read the helpful article by Sandra Block in USA Today, then contact your local lender.

If you're interested in refinancing, writes Block, here's what you'll need:

Excellent credit
To get the lowest rates, you'll need a FICO credit score of 720 or higher.

Obtain your credit score before you apply for a mortgage. You can order a free copy of all three of your credit reports once a year at You'll have to pay extra for your credit score.

Once you've received your credit reports, check them for errors that could hurt your score. If your reports show late payments — and the information is accurate — the only way to repair the damage is by showing lenders that you've changed your ways.

However, if your credit reports show large credit card balances, you can raise your score quickly by paying them off. Your "credit utilization" ratio, which reflects to the amount you've borrowed as a percentage of your available credit, accounts for 30% of your credit score.

Home equity
Ideally, you should have at least 20% equity, based on your home's current appraised value. Most lenders will require an appraisal before refinancing your loan, and if the value of your home has dropped, you may be unable to refinance, or decide it's not worth the trouble.

Homeowners with less than 20% equity may still be able to refinance, but they'll probably need to buy private mortgage insurance, which is no longer available in some markets.

An unencumbered first mortgage
If you have a home equity loan or line of credit, you'll probably need to pay it off before refinancing.

Before a lender will refinance your first mortgage, it typically needs approval from the lender that holds your second mortgage. The lender with the second must agree to "subordinate" the loan.

In the past, that hasn't been a problem. But in the wake of the credit crunch, many lenders are eager to rid themselves of home equity lines and loans, which are considered riskier than first mortgages. As a result, many lenders are refusing to subordinate their loans.

A conforming loan
Borrowers in high-cost areas may not qualify for the lowest rates, even if they have outstanding credit, lots of equity and no second mortgage. That's because the interest rates for loans that exceed $625,000 — known as jumbo loans — have remained high. The [national] average jumbo rate is 6.8%.

Nationwide, the lowest rates are limited to loans of $417,000 or less. Those are known as "conforming" loans because Fannie Mae and Freddie Mac will buy them in the secondary market.

Some borrowers are waiting days to get their calls returned, if they can get through at all. In this market, "Patience is not just a virtue, it's a necessity."

NOTE: If you have details on the Chicago refinancing market, we invite you to post them by clicking on the Comments link below. Please identify yourself.

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