Credit, equity right for refinance

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Dear Dr. Don,
I’m thinking about refinancing my home, but I don’t have enough in savings to cover the closing costs. The home is worth about $205,000, and my first and second mortgages (6.25 percent and 8.55 percent, respectively) currently have a combined balance of $120,000. Last month, a credit bureau reported that my credit score is 732.

I love this home and am not going anywhere soon. Can you advise me as to what’s the best direction to take in refinancing my home?
— Karen Considers

Dear Karen,
While you’re not an “A” credit, your credit appears to be in good enough shape that you should qualify to refinance your loans. The Web site gives a general overview of how mortgage rates vary by credit score and shows the lowest mortgage rates for people with credit scores between 760 and 850. The next best rates go to borrowers having credit scores between 700 and 759.

Credit scores are based on the information in your credit report, so your credit scores from each of the three major credit bureaus — Experian, Equifax and TransUnion — aren’t necessarily the same. Before getting too deep in the refinancing process, it would be a good idea to review all three credit reports and credit scores. Bankrate provides contact information on its “Contacting the credit bureaus” page.

Make sure there is no inaccurate information on your credit reports, and ask to see all three credit scores. If you find inaccuracies, the Bankrate feature “Fixing mistakes on your credit report” will help you set the record straight.

If your estimate of the market value of your home is close to reality, you’ve got plenty of equity in your home and should be able to avoid private mortgage insurance. You can finance the closing costs, so you don’t have to worry about funding the costs out of savings.

The best approach is likely to be a cash-out refinancing of the first mortgage with enough in proceeds to pay off the second mortgage. Use Bankrate’s “Savings from refinancing” calculator to estimate the savings over the life of the loan.

Even if the lender advertises a loan with no closing costs, you pay the costs of originating the mortgage one way or another. Financing them can make sense if it allows you to lock in a new loan at a lower rate.

Read more about refinance mortgage rates.

Read more Dr. Don columns for additional personal finance advice.