refinance

What to know before refinancing

Let's say you bought your home for $300,000 at the market top, but recent sales indicate your home is worth just $225,000. A neutral third-party appraiser confirms this. You owe $280,000. How can you expect the lender to give you a loan for $280,000 at more favorable terms?

The fact is, you'll likely have to pony up the difference between what you owe and what the refinancing bank is willing to lend you. If you have the cash and you expect to stay in the home for many years, then it may be worth taking this step. Eventually property values will rise again, but it will take time.

The worst thing you can do is walk away from the home altogether. If you're considering foreclosure, consult an attorney. Avoid this step if at all possible.

What if you're not ordinary?

If you're self-employed, the process is a bit trickier. Fewer lenders want to deal with unconventional financial situations, but if you have a high credit score and a large down payment plus proof of your income, it's possible to find a deal.

Homeowners who have second mortgages may also run into some difficulties. Before you can refinance the first mortgage, the holder of the second mortgage must agree to subordinate the second mortgage to the new first mortgage. If that lender refuses, the homeowner must then qualify for a new first mortgage that will pay off the second.

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In these cases, it's best to go to a mortgage broker rather than directly to a bank, since a broker has access to a variety of lenders that offer different loan products.

What steps do you need to take?

The fact is you need two stellar assets these days before you can refinance: an excellent credit score and enough equity in your home. If you have at least 10 percent equity in your home -- ideally 20 percent or more -- or some spare cash to fill in the difference between the amount owed and the amount you can borrow, start the process by checking your current mortgage note to be sure there's no prepayment penalty.

Next, get a copy of your credit report and check your credit. These days most lenders are requiring good credit scores, though some programs exist to help out borrowers with mediocre scores. The problem is that those borrowers likely will have to pay a surcharge or higher interest rates. Under these circumstances, you need to decide if it makes sense to refinance.

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