Refinance Your Mortgage?
Mortgage rates are at an all-time low. To have the option of refinancing, you need to have a strong financial position. Who can qualify and what do you do if you can’t?
The current fixed 30-year mortgage rate is under 4%. If you have a variable rate mortgage or if your current rate is above 4.5%, it may make sense to investigate your refinancing options. Refinancing fees need to be considered to determine the benefit of a lower interest rate. However, if it does make sense, a lower borrowing rate can reduce your monthly payment, freeing up cash for other needs. Refinancing can also provide an opportunity to reduce the number of years until you are mortgage-free. The current rate for a 15-year fixed mortgage is less than 3.5%.
Financial Requirements for Refinancing
Given the low mortgage rates, any homeowner with a strong financial situation should consider refinancing. Unfortunately, lending institutions may be less flexible with the requirements to refinance than in the past. To take advantage of this opportunity to refinance, your credit score must be strong, you need equity in your home, and you must have current income.
There are three important factors that determine whether you are eligible to refinance:
· Credit Score. Your credit score reflects your ability to be responsible for your finances and is largely based on your history for making timely payments, any loan defaults, and your overall amount of debt. Most lending institutions use the credit score as an indicator of your likelihood for paying back the money you are borrowing. Generally speaking, you need a credit score of 620 or above to refinance.
· Equity in Home. It is best if your outstanding loan balance is equal to 80% or less of the fair market value of your home. Because of the collapse of residential real estate values, this may be a challenge for some homeowners. A special program that can assist in these situations is discussed below.
· Current Income. In order to refinance, lending institutions are requiring borrowers to have current income. Regarding the amount of income, the rule of thumb is that your mortgage payment should be no greater than 30% of your gross monthly income. In addition to the mortgage, if you have a vehicle loan, other personal loans, or outstanding credit card debt, all debt payments should not exceed 40%. For example, if your monthly income is $5,000, your mortgage should not exceed $1,500 (30% of $5,000) and total monthly loan payments should not exceed $2,000 (40% of $5,000). For most borrowers, current income will consist largely of employment wages. Also counted as current income is investment income (dividends and interest), Social Security, and pension payments. For this reason, retirees may be eligible to refinance. Unfortunately, accumulated assets are no longer considered as a substitute for current income. Given these parameters, if you are unemployed, it is unlikely that you can qualify to refinance.
The above information is meant to be a general guideline. If you fall slightly short in any area, it may still be worth a conversation with a mortgage professional. If you cannot qualify for a traditional program, there are alternatives that may provide another option.
Options to Traditional Refinancing
· Credit Score too Low. If your credit score is preventing you from being eligible to refinance, review the contributing factors and take appropriate action to improve your score. Also, a score lower than 620 may work for an FHA loan; however, there are other qualifications that you must meet.
· Little or No Equity in Home. If your mortgage is greater than 80% of the fair market value of your home, or if you have negative equity (mortgage exceeds value of home), an option to consider is the Home Affordable Refinance Program (HARP). This is a government-sponsored program that will allow refinancing a home if there is little or no equity in the property. There are several requirements to be eligible for this program. One important criterion is that the borrower must be current on the mortgage at the time of the refinance. In addition, there must be a twelve month history of timely payments. For more information on the HARP Program, go to the government’s website at www.makinghomeaffordable.gov.
Summary
The low mortgage interest rate environment is an excellent opportunity for homeowners to put themselves in a better financial situation. Whether you meet the requirements noted above or not, it may be appropriate to have a conversation with a mortgage professional.
