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Refinancing: Five Considerations

[May 5, 2009.]


Volatile real estate markets, adverse economic conditions, and the need to save money are contributing to a refinanancing boom. As with credit requirements for new home loans, the mortgage professor website notes that  lenders have tightened credit requirements for refinancing.  Borrowers with less than optimum credit scores may pay mortgage rate premiums that can negate potential savings associated with refinancing.

Best Refinancing Rates: How to Qualify

As part of their underwriting process, mortgage lenders consider these factors when qualifying borrowers for refinancing:

  • Mortgage amount: Loan amounts of less than 417,000 typically qualify for lower rates than mortgages of more than $417,000. Although Fannie Mae and Freddie Mac will purchase loans up to $625,000 in certain high cost areas, borrowers can expect to pay a premium for mortgages over $417,000.

  • Excellent credit score: Mortgage lenders typically require a FICO credit score of 740 or above to qualify for the best mortgage rates; some lenders may require scores as high as 780. Borrowers with credit scores above 700 may pay up to a rate premium of about an extra percentage point; Those with a with credit score below 600 may find it's not worthwhile to refinance, as interest rate premiums may exceed two percent.

  • Home Equity/Loan-to-Value (LTV): Refinancing for more than 80% of current home value requires the additional expense of mortgage insurance. To determine current LTV, divide the proposed refinance amount by the home's current appraised value.

  • Location, location: Homeowners wanting to borrow more than $417,000 (a jumbo loan) may pay a premium of up to 2 percent if the property they're refinancing is not located in an approved high cost locale. Jumbo loans made on properties outside of approved high cost areas are not eligible for purchase by Fannie Mae or Freddie Mac, and are called "non-conforming" jumbo loans.

  • Closing costs and points: Refinancing involves getting a new mortgage loan that replace an existing mortgage loan; refinancing incurs costs similar to getting a new home loan, and may include "points." A point is equal to one percent of the mortgage loan amount. Point are paid "up front" when  refinancing is completed. When comparing refinancing rates to a current mortgage, or multiple refinancing scenarios, it's important to include all costs of refinancing to get an accurate estimate of potential savings.

Before accepting refinancing terms, take time to shop and compare refinancing rates and terms to find the best deal.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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