Mortgage refinancing isn’t something we think about on a regular basis. Heck, most of us have the mentality that once we locked in a semi-decent rate, we’re good to go for a while. That shouldn’t always be the case tho. As we all know, rates tend to fluctuate constantly, and even the slightest movement downwards can save you thousands over the course of the next few years.
What is Mortgage Refinancing
The simplest answer here is that you’re taking out a completely new mortgage all the bells and whistles. The point of doing that is the new mortgage pays off the remainder of the old one, and you end up with a new rate, and payment schedule. If done correctly, it can, and will save you a ton of money.
The Basics of Mortgage Refinancing
Everyone’s credit score is different. But it’s safe to assume that, if you have bad credit you will likely not qualify for the lowest rate when you refinance your home. However, regardless of the number on your credit report, every individual having bad credit can increase their chances and get tips on knowing how to refinance and improve their credit.
Generally speaking, those with a credit score that falls below 620 are very likely to not qualify for any type of refinance. However, the good news is that bad credit can be improved in a shorter amount of time than you may think.
Get Your Reports Before You Think About Refinancing
The fact of the matter is that errors on a credit report often occur far more frequently than you may realize. This is why it’s so important to ensure that you check your reports from all 3 credit agencies on a regular basis.
Your Credit Score Isn’t the Only Factor
Although it may appear as though your credit score is the main barrier to you being able to get a mortgage refinance, the truth is that it’s only one of several factors. Lenders also consult other information, such as how much money you owe, your income and similar items. However, those three numbers on your credit report are very important when trying to know How To Refinance apart from your ability to do it.
As well, your credit score will not necessarily result in a refinance approval, even if it falls within a favorable range of scores. But aiming for a FICO score of around 620 will provide you with a bit of a cushion.
Higher Scores Needed For Approval Today
In the old days, anyone having a score of 720 or thereabouts would be able to obtain the lowest available rate on their mortgage. However, these days, the best rates can be had for applicants with scores of 760 or higher.
One thing to keep in mind is that your interest rate will rise as your credit score decreases. Although interest rates do change on a daily basis, on average, the difference between the rates obtainable with a high and low credit score can differ by more than 1.5%. Those thinking that 1.5% doesn’t seem like much will be surprised to know that this can translate into significant monthly amounts – more than $250 monthly, in many cases.
Refinancing With Bad Credit
As stated earlier, improving your credit score is one of the best ways to increase your chances of being able to get a mortgage refinance. But it’s the timing that counts most in this scenario. Anyone with bad credit wishing to refinance their mortgage should begin taking steps to improve their score months before they actually apply for the refinance. As well, it’s important to know your debt-to-income ratio when trying to refinance with bad credit.
If your credit and financial situation has worsened since you obtained your first mortgage, then refinancing your mortgage may not save you much money. If they have remained the same since you first obtained your mortgage, it becomes more difficult to determine whether a refinance will save you money. Determining your answer will involve not only looking at the changes in mortgage rates, as well as considering your reasons for wanting to refinance your mortgage.
No-No vs. No-Brainer: Consider These Refinancing Red Flags
There are several red flags, which can indicate that refinancing is not a good idea for you. One of these is if you are going to be paying off your current mortgage very soon. This is because a refinance can extend your loan term, as well as up your refinancing costs due to the fees associated with refinancing.
The same is true if you plan to move in the next year. The costs associated with refinancing can end up taking more than one year to eliminate. If your current mortgage has a prepayment penalty, this could mean that you pay high fees if you choose to refinance prior to the expiry of a particular time limit. Usually, these time limits can extend from one to five years. However, if you find that you will save enough from a refinance to easily cover the prepayment penalty; it may be worth it to refinance your mortgage.