With long term interest rates hovering at just over five percent, refinancing a mortgage can be a tempting prospect. Currently, financial institutions have much stricter lending criteria and not everyone who applies for new funding is accepted.
Get an edge before you visit your local lender. Here are some of the things banks consider when determining a borrower's eligibility for refinancing.
Home Equity:
With falling house values it's not uncommon for homeowners to find themselves owing more than their home is worth. A lender won't finance a home with too little or negative equity. Some lenders will refinance without a home appraisal, but those are few and far between.
Currently the federal government is offering assistance to homeowners in a negative equity situation by writing down the value of these mortgages. Details about this program should be unveiled shortly.
Insufficient Earnings:
If you cannot prove that you are making an adequate salary to pay for your new refinancing or have a family member to co-sign, then it's likely you'll not receive your loan.
Poor Credit Score
Even if you are making a good salary, if your debt-to-income ratio is out of whack, or you have a poor credit history, then you are likely to be declined. The banks want to feel confident that you can handle your finances and repay your loan. Generally lenders are looking for a credit score of over 720 to 760, which is considerably higher than it was a few years ago.
You may qualify for a FHA loan which requires a lower credit score than most lenders accept. Check out http://www.Hud.Gov.com for more details.
Attempt to boost your credit history for a few months before applying for refinancing by paying your bills on time, making at least the minimum payments and not carrying large balances.
You Own Too Many Properties:
In the past, a real estate investor could have easily owned up to ten properties and still refinance. Today, however, an investor may experience resistance from lenders if they own more than four properties at the same time.
Unfortunately, too many lending institutions have been burned by investors that owned multiple properties and then experienced a decrease in property values. In many cases they financed using a low interest rate teaser which converted into a higher rate, and have landed in a negative equity situation.
The Refinance Isn't Worth It:
There are a number of factors beyond lower interest rates that determine whether refinancing is the right move.
First: Taking the costs of refinancing into account, will you be able to save enough to recoup these costs in one year?
Second: Will you be remaining in your existing home for at least four to six years?
If you answered "yes" to both of these questions, then it probably makes sense to refinance. Do not, however, reduce your payment, unless you are having a cash-flow problem. The ideal scenario is to keep your payment the same while simultaneously reducing your interest rate, thereby paying off your mortgage sooner.
