It is time to consider refinancing your mortgage.
Assuming you have a television, a radio or internet access (otherwise, how you would be reading this) you have heard that mortgage rates are low. How low? 4.5%? Not quite, but close enough.
The media has done a good job at getting the word out to consumers that mortgage rates are low; unfortunately, it has not done a great job of letting the public know that, like the stock market, the mortgage market is volatile. Mortgage rates dipped down to their lowest levels in some 30 or 40 years a couple of weeks ago (in the 4’s) and then proceeded to climb back up to 5.25% during the holidays. The good news is that now with the government buying up mortgage backed securities, it looks like we may be headed down again — or at least for the time being, facing in that direction.
If you are considering refinancing your mortgage (and you should be), here are a few things you can do to get ready to refinance.
“Be Prepared.” A great motto to live by.
Number 1: Know Your Mortgage Numbers.
If you haven’t reviewed refinance numbers yet, you need to. If you have an interest rate at 5.5% or higher, then you need to take 10-15 minutes and find out IF it makes sense for you to refinance your mortgage and of equal importance, find out WHEN it makes sense to refinance your mortgage (see my blog posts below on information about myRateTrack.com, about getting refinance numbers and on setting a target refinance rate).
Number 2: Know Your Credit Score Numbers.
If you haven’t reviewed a copy of your credit report in the last 3 months, you need to. With credit score based pricing (or what I call, hyper-sensitive credit score pricing), the difference between a credit score of 679 and 680 could mean an increase in your interest rate by a 0.25% or more. Even the difference between 739 and 740 could mean a few dollars each month in savings. In the past, a credit score of 680 and above meant you could get a mortgage at the best rate. A year or two ago lenders changed the “best” to mean any credit score at 700 or above. Now, and since the beginning of 2008, lenders adjust available rates for credit scores at 660, 680, 700, 720 and 740. To get the very best interest rate, you need a score of 740 or above. (Lenders use the middle credit score of each borrower on the loan and use the lowest middle as the “qualifying credit score” to determine the available interest rate).
Number 3: Know Your Market Value Numbers (appraised value).
This is becoming an increasingly common (and annoying) problem for many consumers trying to refinance their mortgages. In the past, distressed sales and foreclosures could be discounted by the appraiser and often times not used in the overall calculation in determining the value of your home. But, because of the increase in these types of sales, and because of lenders requirements for appraiser to use more recent comparable sales, many homes are appraising for less than expected (some less than what they were purchased for a year or two ago).
To qualify for a conventional mortgage refinance, you need to have at least 5% of un-mortgaged equity in the property. This equation takes in to account the total liens on the property. So, if you have a 2nd mortgage on the house, the 2nd mortgage could actually prevent you from being able to refinance your 1st mortgage. (The 2nd mortgage company also has to approve the 1st mortgage refinance through a process of agreeing to “subordinate” to the new 1st mortgage. This is a separate issue, but can also be a problem in trying to refinance). Here is an example of the 5% un-mortgaged equity. If a borrower has a 1st mortgage of $150,000 and a 2nd mortgage of $40,000 and the closing costs to refinance the 1st mortgage are $3,500 . . . the new loan amount for the 1st would be $153,500. So, in order to avoid PMI (private mortgage insurance), the house would need to appraise for (80% LTV) = $191,875. But, because of the 2nd mortgage (95% CLTV, or combined loan-to-value) the house will need to appraise at $203,685. A little confusing, I know. It gets even more confusing if the 2nd mortgage company comes back and says that their subordination approval requires a CLTV of 85% (now, because of the 2nd mortgage, that allegedly saved borrowers from the “evil” of paying PMI [sarcasm], the house would need to appraise for $227,647).
So, do yourself a favor. Be prepared. If you aren’t prepared, it won’t necessarily mean that you will have to try and sleep in a tent with a soaking wet sleeping bag and a half-inch of cold water all around you that has seeped in because you forgot to tuck under your ground cloth like your dad taught you to do (ah, lessons learned the hard way) . . . but it could mean that you pay more $$ each month in mortgage interest than you really should be.
Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.