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Refinancing: Navigating the Road to Success

Posted by  on Jan 25, 2010
 

In today's conservative credit environment, it can be difficult to refinance your mortgage if you don't meet loan requirements established by Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA). These agencies own or insure the majority of home loans made in the US. Here are some considerations that can help you gain the most benefits from a mortgage refinance.

Compare Your Current Mortgage with Refinancing Rates and Features

  • What you have now: Fully understanding the mortgage you have now assists in determining the refinance rates and features you need. Is your current mortgage a fixed rate (FRM) or adjustable rate (ARM)? What is the remaining repayment term? Does your mortgage have any unusual features such as interest only payments or negative amortization?
  • What you want: Your answers to the above questions can help you map out your "ideal" refinance mortgage. Although the primary reason for refinancing is lowering mortgage rates, you may also be able to eliminate features that are keeping you from paying off your mortgage as fast as possible. Homeowners looking to pay off their mortgage loans sooner may wish to refinance a 30 year FRM to a 15 year FRM. This requires higher monthly payments, but you could save thousands of dollars in interest. Knowing what you wish to accomplish through refinancing can help you focus on refinance options that meet your needs.
  • Special note for ARM loans: Know when, how, and why your ARM loan adjusts. Homeowners with ARMs often assume that their rates and payments will go up every time their mortgage rates adjust--that's not necessarily true. Research your loan documents and learn how your mortgage rate can adjust. In some cases, your mortgage rate may decrease, or it doesn't increase enough to make paying the costs of refinancing a good investment.

Including Refinance Rate Premiums in Savings Calculations

Certain situations are deemed more risky by mortgage lenders; they assess premiums to posted mortgage rates accordingly. Here are some circumstances that can raise rates for a refinance mortgage; when requesting mortgage quotes, mention any of these conditions if applicable:

  • You owe more than $417,000 on your existing mortgage: If you owe more than this, you may have a jumbo loan. It's possible to refinance jumbo loans, but they typically increase rates by one to two percent, depending on whether or not you can refinance to terms approved by Fannie Mae or Freddie Mac.
  • Your home is a condominium unit, manufactured home, or 2 to 4 unit dwelling: Refinancing these types of homes typically requires a mortgage rate premium. This should be taken into consideration when comparing refinance rates to your current mortgage rate.
  • You're financing investment property: Rates for investment properties are generally higher than for owner occupied homes.
  • You're refinancing for more than your existing mortgage balance: This is called cash-put refinancing and it can increase refinance rates. Borrowers are generally permitted to roll closing costs into their refinance mortgage without incurring a premium.

Factoring mortgage rate premiums into your savings calculations provides more accurate results.

Bumps in the Refinancing Road

Mortgage lenders are now enforcing underwriting requirements and are less flexible than they were during better times. Borrowers meeting stiffer requirements may qualify for more favorable refinance rates.

  • Credit scores: Credit scores of 740 or more will likely yield the best available rates subject to conditions described above. Borrowers with less than excellent credit can expect to pay higher refinance rates and/or points. A point is one percent of your refinance loan amount.
  • Home equity: Borrowers refinancing 80% or less of their home's current value avoid the additional cost of mortgage insurance premiums. Mortgage insurance protects your lender in the event of mortgage default, which is deemed to be increasingly risky for loans of more than 80% loan-to-value (LTV).
  • Documentation of Income: Be prepared to provide solid proof of all sources of income used for qualifying for a refinance mortgage. Mortgage lenders typically require the two most recent years' W-2s or tax returns, verification of employment, and verification of deposits to your bank accounts.

Hit a Refinance Pothole? Try These Options

Not everyone can qualify for a conventional mortgage refinance. If you've had credit problems, or have problems documenting income, an FHA refinance may work for you. If your mortgage loan(s) exceed the value of your home, you may qualify for refinancing up to 125% of home value through the Making Home Affordable program. Contact mortgage lenders to determine eligibility and get mortgage quotes.

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