Money Power: Refinancing: It's not too late
BY PATRICIA MERTZ ESSWEIN Money Power
Saturday, January 26, 2013
1/26/13 at 4:33 AM
With the 30-year mortgage rate still below 3.5 percent, homeowners who have not refinanced should consider doing so and possibly cut their house payments by hundreds of dollars a month.
To get past the application process, you'll need at least 5 percent to 10 percent equity in your home.
To make a refi worthwhile, you must keep your house long enough for the savings in monthly payments to cover the closing costs (closing costs average 2 percent of the loan amount, according to Bankrate.com).
Your first move is to beef up your credit profile if you can, and prepare to fork over heaps of documentation. To meet standards set for refis by Fannie Mae and Freddie Mac, lenders expect you to have a FICO credit score of at least 660 to 680, a housing-debt-to-income ratio of no more than 28 percent and a total debt-to-income ratio of 36 percent or less.
Your likelihood of nabbing the best rate and lowest closing costs goes up with a high credit score, an unblemished credit history, low debt and a high percentage of equity in your home. It also helps if the home is your primary residence, you take a shorter term (15 or 20 years) and you have additional financial reserves.
Mary Ellen Nicol of CredAbility.org, a national consumer credit-counseling agency, advises that you double-check your credit reports from Equifax, Experian and TransUnion - free annually at tulsaworld.com/creditreport - to ensure that no errors drag down your score. At tulsaworld.com/fico, you can get a FICO score - the most commonly used credit score - and a credit report from Equifax or TransUnion for $20.
If your credit is less than stellar, check out smaller banks, credit unions and mortgage brokers who can help you find a loan program. Multiple credit checks won't diminish your credit score if they occur within a three-week period, but Nicol suggests that you add a buffer by completing the task in two weeks.
Once the refinancing is under way, don't open new credit lines or increase the balances of your existing credit, because lenders will reverify your debt-to-income ratios just before closing. If the ratios exceed the lender's limit, it must requalify you.
A good mortgage loan officer will let you know what documentation you need to provide up front - typically pay stubs, W-2 forms, tax returns, and bank and investing statements.
If you don't help your loan officer meet the lender's deadlines, you may have to start over, in which case you'll lose the rate you locked in.
Original Print Headline: Refinancing: It's not too late
Patricia Mertz Esswein is an associate editor at Kiplinger's Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.