Check terms of loan before refinancing

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Dear Dr. Don,
I have an 80/20 mortgage and I’m 2½ years into the loans. In July 2009, my rate will start adjusting. Can I refinance now or do I have to wait until July? Is there any help out there to get me out of the 80/20 situation that I was forced into?
— Susan Second

Dear Susan,
Reviewing the terms of your note is always a good first step. You want to be sure there’s no prepayment penalty on the loan(s). You also want to understand where you can expect the loans to reset.

Adjustable-rate loans reset at a spread to the interest rate they are priced against. You can follow those rates on Bankrate’s Rate Watch: Track leading interest rates pages. With the current downward pressure on short-term interest rates, you may be in much better shape on the reset than you think.

So it’s possible that you won’t want to refinance out of the current loans. If that’s not the case — and there’s no prepayment penalty on the loans — there’s no reason that you can’t start the refinancing process now, instead of waiting until closer to reset date.

Make sure your credit is as pristine as you can make it before applying for your new loan. This is a critical step in times when lenders are tightening up their credit standards in approving new loans.

Review your credit reports and dispute any incorrect information. The Bankrate features, “How to get your free credit report” and “Fixing mistakes on your credit report” should help you with this process, but you’ll also want to get copies of your credit scores as you get ready to apply for a new loan. You’ll also find links to the three major credit agencies in the Bankrate feature “Contacting the credit bureaus.”

Another risk with an 80/20 loan program is that you’re underwater in one or both of the loans. If that’s the case, you’ll find refinancing problematic and probably need more help than I can provide in this column.

Mortgage relief may be on the horizon with a government program that will let you restructure these loans. Keep reading Bankrate for updates on these programs.