Over the past few years, the real estate market has obviously changed. The home loan market has changed too. Rates are cheap, but loans are harder to come by. Today, you probably find yourself in a situation where everything you thought you could count on is different…much different! It’s time for a quick session of Homeowners Refinance 101.
Let’s break this down to answer 3 very important questions:
#1 How Can Homeowners Refinance When Their Equity Has Been Squeezed?
The first thing to do is to get a reasonable idea of what your property is worth. It used to be that you could simply double your State Equalized Value (SEV) to get an idea of your home value. Tax assessments, however, haven’t necessarily kept time with certain devaluing markets. Websites such as Zillow can provide you with a list of homes in your area that have recently sold, so you can estimate what your property is worth.
Next, determine your Loan to Value (LTV) by dividing your existing mortgage(s) balance by your home’s estimated value. If you’re planning on pulling some of your equity out to pay off other debt or do home improvements, don’t forget to add that dollar amount to your mortgage balance(s).
Most mortgage lenders will easily refinance a property with an 80% or less LTV. An 81 – 95% LTV will require that you pay PMI (Private Mortgage Insurance) each month, in addition to your regular payment. If your LTV is 95 – 97.5%, you may need to consider a FHA loan.
Discuss your LTV with any potential lender during your first conversation. This way, he/she can provide a more accurate estimated monthly payment. Sometimes, even if rates are lower than what you’re currently paying, the potential addition of PMI will increase your monthly payments, which might not make sense for your situation.
#2 How Can Homeowners Refinance When Their Credit Score Has Been Shrinking?
Credit scores range from 350 – 850. The average score is 680, but your goal should be above 725. Anything below this number will increase the rate and fees that you’ll pay. The lower your score, the greater your challenge, so you may want to work on improving your credit score before you apply.
Get a copy of your credit report, review it and clear up any discrepancies. Pay down any debt you can and pay on time! The most recent 12 months of your credit history makes up 40% of your score, so before homeowners refinance, fix as much of your credit up front as possible.
#3 How Can Homeowners Refinance With The Loan Structure That’s Best For Them?
With so much in the news about people losing their homes because they agreed to a crazy loan structure with mysterious rate adjustments, the idea of selecting a lender and loan structure can be scary. Who can you trust?
The bottom line is this, no one knows more about your financial situation than you! You know how much you can afford. It’s the lender’s responsibility to provide you with your total costs before and after closing. At a minimum, ask the following questions before agreeing to anything:
- What will my total cost be at closing?
- What will my payment be each month?
- What is the breakdown of principal, interest, homeowners insurance?
- Do I have to pay PMI?
- What will my payment change to, if I pay a point (1% of loan amount) at closing?
- Does the rate, amortization or structure ever change during the life of this loan?
- Are there any special conditions of this loan?
Don’t be afraid to admit if you don’t understand something. You should be completely comfortable and secure with your choice. When homeowners refinance, they should be putting themselves in a better place and on a better road to attaining their financial goals.