Questions on Avoiding Pitfalls in Refinancing a Home Mortgage
- You will need a favorable credit score to refinance, typically a FICO, Fair Isaac Corporation, score of 720 or higher to qualify or avoid paying a higher interest rate. Before even considering applying for a new loan, order your credit report from the three major credit bureaus, Transunion.com, Experian.com and Equifax.com, to check your scores. If your scores are too low, seek to raise them by paying down credit card balances and ensuring you pay all bills on time. You should also check your reports for inaccuracies and have incorrect entries removed.
- As a rule of thumb, the amount of equity -- the portion of the home you own instead of the bank -- should be at least 20 percent of your home's appraised value. It's a good idea to have your home appraised before seeking to refinance so you'll know if it's worth the effort. You may still be able to refinance if your equity level is below 20 percent, but you'll probably have to bear the additional expense of carrying private mortgage insurance.
- If you're planning to move in the next two or three years, refinancing may be a losing proposition. The amount of the closing costs you pay when refinancing could offset or even exceed the savings in lower interest rates and monthly payments. You can probably expect to have to stay in the home a minimum of five years to begin to reap the true financial benefits.
- The only way to really know for sure if you benefit by refinancing over the long haul is to "do the math." A primary factor will be the difference in the interest rate between your current and proposed loans. Of course, if you're refinancing to or from an adjustable-rate mortgage where interest rates can change periodically, the difference can be difficult to pin down with any certainty. Other factors to consider include closing costs of the new loan, your current mortgage payment versus the proposed payment and the length of loan terms.
