Are You Ready To Refinance

by S. Furgason
(Huntersville, NC)

Here are easy steps to determine if you are ready for refinancing. As anyone who's read the paper or watched television in the last few months knows, the housing crisis in the US has significantly disrupted the financial markets and specifically mortgage lenders.

This used to be an anything goes business where you didn't have to prove income, you could pay on only the interest of a loan and you didn't need to put anything down.

Many people got wrapped up in home purchases that they thought they could afford based on adjustable rate mortgage rates of 2 and 3% thinking that they may sell their home for a profit before their rate would adjust.

Those days are gone and if you find a lender willing to lend on those terms, that should be a warning sign that you are missing something in the terms.

If you're one of the people that financed a mortgage under these conditions there's a few steps to get you back on track.

First, figure out what you can truly afford. Banks used to qualify borrowers based on their ability to replay the loan by determining the amount of the payment against their income. The loan should not exceeded 28% of your gross income. This 28% includes principal, interest, taxes and insurance on the loan. In some markets this is going to be a difficult number to meet but it's a important measure.

Another number is 36% which includes the previous items and all of your debt payments monthly. These aren't perfect calculations but if you calculate the numbers and you are off by more than 3%, I'd suggest you can't afford the loan you need and maybe you should consider selling and getting into something you can afford. Not many people want to hear this news but often it makes sense to rent if this is your case.

Second, clean up your credit. Your ability to pay is best represented by your credit history. Fortunately, this is relatively easy to do. You can get a free credit report from each of the three major credit reporting bureaus once a year. Get your credit report from all three bureaus and make sure everything is accurate. If it's not follow the instructions in the report about how to dispute incorrect information.

When you pull your credit report, also get a credit score. This should cost you about $6-9. You don't need fancy credit monitoring so don't get suckered. The credit score will be an indicator to you and to lenders about how good you are at paying your bills. A good credit score will also have the most impact on the rate you get from a lender. It pays to build up your credit score and most credit scores will tell you the factors that are helping or hurting your score.

The number one way to improve your score is to pay on time every time. NEVER be late on your payments. If you can't pay your payments consistently then you have a cash flow problem in that you are spending more than you make. If that's the case you need to decrease your spending or reduce your costs (again that might mean selling your house and renting).

Third, find a good rate for a mortgage. First check online and then your local newspaper. In my area, online rates beat local rates 90% of the time.

Fourth, before you sign a mortgage read every detail and make sure you understand the mortgage details in full. Don't just sign it without reading it. If you don't understand the terms, make sure the lender can explain them. If you still don't understand, then don't sign.

Refinancing can be a key to saving a lot of money. Make sure you've done the legwork to make the refinance successful. Also, take heed of step 1. If you really can't afford the home you are in you should consider getting out and into something you can afford.

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