Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Getting out of an interest-only loan

Dear Dr. Don,
I have been in an interest-only mortgage at 10 percent for the past six months with a private investor. I am planning to change the terms of the note with the same investor to 9-percent interest for 15 years.

My loan is for $85,000. Should I try to go with a conventional lender or stay with my private investor? I realize I might get a better interest rate with a big bank, but feel my credit is not good enough for the big boys. What would you suggest?
Kathi Credit

Dear Kathi,
Take the guesswork out of the lending process by getting a copy of your credit report and your credit score. Any one of the three main consumer-reporting agencies -- Equifax, Experian, and TransUnion -- can provide you with a credit report and a credit score.

My preference is to use Equifax's Score Power where for $12.95 you get a copy of your Equifax credit report and your Beacon Fair Isaac credit score.

If you comparison shop for mortgage loans within a short period (two to four weeks) multiple loan inquiries won't hurt your credit score. That's because it's self-evident that you're shopping lenders.

It would be unusual for someone to refinance several homes in a month, so several mortgage applications doesn't raise a red flag. Stringing it out over a longer period, however, can hurt your credit score and your ability to get a good interest rate.

Postpone looking for a new credit card or any other type of financing until after you close on your refinancing because these credit inquiries will lower your credit score. (Don't worry about those pre-approved offers you get in the mail. Marketing pitches initiated by credit card firms don't hurt your rating if you don't respond to the mailer.)

Currently an A credit qualifies for a 15-year, amortized mortgage at a national average of about 6.3 percent. (Bankrate has feature that will help you to estimate your credit grade.)

You weren't clear whether the private investor was offering a 15-year amortized loan at 9 percent or an interest-only loan for that rate and term. Regardless, you don't really want an interest-only loan for a 15-year term and as an A or B credit you should be able to do better on a first mortgage refinancing for an amortized loan.

-- Posted: May 24, 2002