All it takes is a modicum of good news, and housing industry analysts are calling an end to the recession.
Pending home sales ticked up this week, and mortgage interest rates dropped again to the lowest level in more than 60 years.
If you’ve been thinking about refinancing, it’s time to develop a plan and get moving before interest rates start moving in the other direction.
If you want to have a successful refinance in the current wacky world of mortgage finance, you’ll want to take these steps:
1. Pull a copy of your credit history and credit score. Go to AnnualCreditReport.com and pull a free copy of your credit score from each of the credit reporting bureaus and then pay for a copy of your credit score, which will cost around $9. Alternatively, you can purchase a combined credit history and score from MyFico.com, which is run by Fair Isaacs, the company that created the credit score.
2. Evaluate whether you need to fix your credit history and score. Lenders today want to see a credit score of at least 620 to 660 (depending on the lender), and will pull a credit score from Equifax, Experian and TransUnion, using the middle score as your official “credit score.” If your credit score isn’t where it needs to be (higher is better), then think about whether there are errors or other factual information that needs to be fixed on your credit history and whether that will help pull up your score. If not, and you’re suffering from financial errors and problems, you might want to consider waiting until your credit report is stronger before applying for a loan.
3. Gather your financial documents. Lenders will want to see your tax returns, bank accounts, retirement accounts, statements of assets, paycheck stub and other documentation. Each person who is applying to be on the loan will need the same set of documents. If you’re self-employed, or if you own your own business, expect to provide many more documents about your business, including tax returns and a current budget and income statement.
4. Shop around for the right lender. Sure, you should let your current lender know you’re looking to refinance. But you should also chat with some other lenders in your area, including a big national bank, a local mortgage broker, a credit union (if you belong to or can join one) and a community bank that portfolios some of the loans they close. Be sure to talk fees, costs, points, and how quickly the lender can close.
5. Will your second lender subordinate the loan? When a second lender subordinates its loan, it’s basically telling the first lender that the first lender will get first dibs on the property in case it has to sell the property to satisfy the debt. If there is money left over, the second lender could get those funds. You won’t be able to refinance if you have a second loan and the second lender won’t subordinate that loan to the new first lender. Think about it – why would provide a first mortgage if the second loan lender gets to be paid first in case of default. If you have a second loan and don’t know if the lender will subordinate, you’d better call and find out.
6. Choose the right program. Some homeowners don’t mind adding years to the loan if they get a lower payment. Some homeowners are refinancing to both lower the interest rate they’re paying and shave years off of the loan term. Others want to do a cash-out refinance. Figure out what you’re trying to do by refinancing and then go after the right loan program. One option these days may be to focus on shaving years from your loan. If you can cut your loan term from 23 years (left on your current loan) to 15 years, you’ve just saved yourself eight years of payments. Your payment may be a bit higher, but over the long term it might be well worth it.
7. Follow up with your lender. The one thing you don’t want to do is apply for the loan and then let time start ticking away. Stay in touch with your lender, calling at least once a week or so to make sure the loan officer has all the documentation he or she needs to close.
8. Read your mortgage documents before you sign them. I’m not saying that the lender is going to make a mistake, but it’s been known to happen. Also, there are a lot of new required disclosure forms, and other kinds of pages you’ll have to read and sign, so be sure to schedule enough time to go through everything so you understand it.
Once your closing is done, all that’s left for you to figure out is whether it makes sense to apply your monthly mortgage “savings” toward prepaying your mortgage and cutting your loan term further.
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