3 ways to prepare for a refinance

June 22nd, 2012

If you are working towards refinancing a mortgage, then a recent inflation report may have helped buy you some time.

You may not be used to hearing inflation and good news mentioned in the same sentence, but a sudden drop in prices might clear the way for low mortgage rates to last a while longer. With many Americans having to delay refinancing because of credit problems or falling home values, this extra time might make the difference in being able to lock in a lower mortgage rate.

The significance of inflation

Inflation isn't the only factor that determines interest rates, but in the recent economic environment, it takes on special significance.

Interest rates tend to fall when the economy is weak, and in the Spring of 2012, the U.S. economy clearly weakened. Between slowing employment growth at home, and concerns about America's trading partners in Europe, most of the signs were pointing to the type of environment that is conducive to low interest rates. Inflation was the only potential obstacle.

However, the past several months have seen the year-over-year inflation rate fall off significantly, from 3.9 percent to 1.7 percent. This creates an environment that is much friendlier to the continuation of sub-4 percent mortgage rates.

What to do in the meantime

Even if credit or home value circumstances prevent you from pulling the trigger on refinancing now, there are three things you can do in the meantime:

  1. Keep paying down principal. Whether it gets your loan above water or simply builds your equity, steady repayment of principal will keep you in good standing with your current lender, and make your mortgage look more palatable to a refinancing lender.
  2. Work on your credit rating. Whether you are repairing your credit or simply maintaining it until you get a chance to refinance, a good credit rating is essential. Lenders are being very selective these days.
  3. Use a refinancing calculator to set a target rate. By running the numbers on a refinancing calculator, you can determine the target mortgage rate at which it makes sense for you to refinance. This way, when you're ready to refinance, you will know what exactly numbers to look for.

Doing these things can help ensure you're in a position to refinance quickly and easily when the right opportunity arises.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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