Improve Your Chances of Refinancing Your Mortgage
By Francine L. HuffHome Worth Columnist
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Mortgage rates are still near historical lows and you want to take advantage of them to refinance your home. You may even have tried to refinance unsuccessfully. Well don't give up hope because there may still be a way you can refinance your home to lower your payments.
Mortgage rates for 30-year fixed loans rose to an average of 5.36% at the beginning of June 2009. But that rate is still very low--the 30-year fixed rate averaged 16.04% in 1982, according to Freddie Mac. So by historical standards there are still good deals to be had on mortgage loans. Unfortunately, lenders have gotten tough on loan applicants, making it difficult for even some people with good credit to get approved for refinancing their home.
Help, My Housing Value Has Fallen and Can't Get Up!
Have you watched the equity in your home drop as the housing market has struggled? Maybe you took out a home equity line at some point. Declining home equity is one of the main reasons many homeowners have had a tough time refinancing. So what can you do to qualify to refinance your home? Here are four things you can try.
Pay Down Your Principal
You'll need to improve your loan-to-value (LTV) ratio to around 80% for many lenders to even consider letting you refinance your mortgage. To quickly calculate your LTV ratio you can get the amount you owe on your home and divide it by its value, an approximation of which you find on a site like Zillow or Cyberhomes.
If you have enough money in a savings or investment account, you could use some of it to pay down your mortgage to improve the chances of qualifying for a refinance deal. If you don't have a large stash of cash but have some discretionary income left over after paying your bills each month, consider applying some of it toward your loan's principal.
Get Help From the Government
The government's Making Home Affordable refinance program is available to some people who have a mortgage that doesn't exceed 105% of the value of their home. For example, if you own a home worth $250,000 but owe $262,500 or less, you may be eligible to refinance. You'll also have to be current on your mortgage, have a loan that is securitized by Fannie Mae or Freddie Mac, and earn enough income to make the new payments.
You also should check out the Federal Housing Administration's (FHA) streamline refinance program. You'll need to be current on payments of an FHA-insured loan to qualify. Refinancing should also lower your monthly principal and interest payments. If the new loan amount isn't greater than the original mortgage, the streamline refinance can be done without an appraisal or credit check--a real bonus if your home's value or your credit rating has declined.
You can use a loan calculator to get an idea of how much your new monthly payments might be. The refinancing calculator can help determine if it even makes sense to refinance right now. Other free mortgage calculators can help you compare loans and get amortization schedules for a home refinance. Keep in mind that mortgage calculators can help you shop for a deal, but you'll still need to meet a lender's requirements for a loan.
Fix Your Credit
Perhaps a low credit score is holding you back from taking advantage of low mortgage rates. These days you'll need a credit score of at least 740 to refinance with the lowest mortgage rates and fees. Paying bills on time and paying off debts will do wonders for your credit score. Also avoid making large purchases just before applying for a home refinance.
Get a copy of your credit report to make sure all the information is accurate. Challenge anything that is incorrect or outdated (your lender may be able to hook you up with a "rapid rescoring' firm to quickly get errors off your credit report for a modest fee). You can work to boost your score enough to qualify for refinancing. It make take several months or longer, but repairing your credit will be worth it.
Dump Your Debt
Of course one of the best things you can do to improve your overall financial well-being is to pay off your credit card and other types of debt. Put together a budget to see where you can cut expenses and redirect that money toward paying off debt. It's a tough job market right now, but if there is any way you can get a better paying job or find a second job to bring in more income, do it so you can pay off debt faster.
About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.
