4 things to know before you refinance your mortgage |
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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.
In these cases, it's best to go to a mortgage broker rather than directly to a bank, because 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.
Besides abundant equity and a good credit score, lenders will also want you to be able to document your employment, income and assets. Lenders have abandoned the practice of offering loans without verifying this information.
If you meet all of those requirements, it's time to start shopping for a loan.
Borrowers can either work with their current lender or find a new one.
Be aware that sticking with the original lender may be easier and less expensive. The lender may not need a new property appraisal, a title search or other items that would normally be required on a new loan. That lender should also be willing to offer a better price because it's easier and more cost-effective to keep a good customer than it is to spend marketing dollars finding a new one.
That said, it never hurts to check out the competition. Start shopping by comparing local and national rates on Bankrate.
If you do decide to shop around, make sure that you do all your shopping within a 30-day time frame so as not to ding your credit score with too many inquiries.
Thanks to the plan from the Federal Reserve to buy up mortgage-backed securities, rates are lower and the refinance business is booming again. For homeowners who qualify, now may be the time to trade in that old mortgage for a better one.
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