How to Refinance a Mortgage

If you are a homeowner with poor credit, your credit score will give you headaches when it comes time to refinance your mortgage. If you do your homwork and research mortgage lender before applying to refinance your mortgage you can save yourself a lot of trouble.

An important concept you will need to understand is loan to value ratio. This ratio represents the amount of your homes value that is mortgaged. You can calculate loan to value ratio by diving the balance of your mortgage loan by the appraised value of your home and multiplying by 100. For example if you owe $80,000 on a home worth $150,000 your loan to value ratio is 80,000/120,000 x 100 = 66%. The lower this ratio the better off you will be when refinancing your mortgage with poor credit.

If you are refinancing you mortgage with a low credit score, your mortgage lender may require you to pay “points” upfront as a condition to qualify.

One “point” is one percent of the loan value paid at closing. This fee is considered prepaid interest and is not deducted from your loan balance. If you refinance your mortgage with a bad credit lender you could be charged as many as five points as a condition to qualifying. This is cash you will need to have on hand before you can close on the new mortgage. Some lenders will finance the points and include them in the loan amount along with closing costs; however, this is a much more expensive alternative to paying the costs up front.

The interest rates you can expect from a bad credit mortgage lender may be as much as three percent higher than loans offered by traditional mortgage lenders. The lender fees and closing costs are usually much higher so it pays to shop around and compare all aspects of the loan, not just the interest rate. Bad credit mortgages should only be used as a temporary solution; you can use this mortgage to rebuild your credit and refinance two or three years later with a better loan.

To learn more about your bad credit mortgage refinancing options, register for our free mortgage guidebook, “Five Things You Need to Know Before Refinancing Your Mortgage.”

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When you are shopping for a new mortgage loan there are a number of questions that will help you find the best mortgage loan. Here is a list of questions that will help you comparison shop for the best loan when refinancing your mortgage.

What is the Actual Interest Rate?

This question is not as obvious as it sounds. Many mortgage lenders disguise the interest rates in their loan offers with introductory interest rates that are significantly lower than the actual interest rate. A good starting point when comparing loan offers is the Annual Percentage Rate (APR); however, use the Good Faith Estimate to compare interest rates, fees, and closing costs whenever possible.

Will the Interest Rate Change, and How Often?

If you have an Adjustable Rate Mortgage it is important to know how often the lender will adjust interest. Find out what index your Adjustable Rate Mortgage interest rate is tied to and what the lender’s markup will be.

Do I Have to Pay Points?

Mortgage lenders may require you to pay points in order to qualify for the loan. One point is one percent of the principal balance you pay at closing. Your lender may also charge origination points as a processing fee for working on your mortgage application.

What are the Closing Costs?

Many homeowners make the mistake of not comparing closing costs when shopping for a mortgage loan. If you neglect to comparison shop for closing costs you could overpay thousands of dollars when you close on the mortgage. Use the Good Faith Estimate from each lender to compare closing costs and do not be afraid to haggle with the lender for more competitive closing costs.

How Long Will the Mortgage Lender Guarantee the Interest Rate?

If the lender will lock-in your interest rate and points this is done for a fixed period of time. You will need to close on the mortgage before the lock period expires or the lender can raise your interest rate. Lock periods are typically 30-60 days; however, interest rate lock periods can vary by mortgage lender. Make sure you get this guarantee in writing before committing to a mortgage lender.

What Documentation is Required?

You need to know the answer to this question in order to organize your effort before applying. You need to close on the new mortgage in a timely manner; failing to produce the necessary documentation could delay your closing on the mortgage. If you fail to close before the interest rate lock expires you could lose your ideal interest rate.

Is There a Prepayment Penalty?

Mortgage lenders charge prepayment penalties when you refinance or sell your home. If you have good credit there is no reason to accept a mortgage offer that comes with a prepayment penalty. If your lender insists on this penalty in the loan contract take your business to another lender.

How Long Will Closing Take?

Mortgage refinancing can be a time consuming process. It is important to close on the new mortgage before the lender’s guarantee expires. If you are unable to close the lender could change your loan terms or charge you a higher interest rate. To learn more about mortgage refinancing and how to avoid common mortgagee mistakes, register for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”

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No Doc mortgage loans allow homeowners to refinance their current mortgage without documenting their employment status, assets, and income to the lender. There are a number of reasons for doing this: some people want to protect their privacy, others cannot document their income due to the type of work they do, the self employed are one such example.

The mortgage documentation you are able to provide when applying for a mortgage about your financial situation the better your interest rate will be. There are circumstances where a homeowner cannot provide or chooses not to provide all of the documentation traditional mortgage lenders want. For these homeowners refinancing their mortgages with a No Doc or even a Low Doc mortgage will provide options that might not be possible with a traditional mortgage lender.

For individuals who are self employed or do not want to disclose their income and assets for privacy concerns No Doc mortgages provide financing at a premium interest rate. Mortgage lenders that specialize in this type of financing may also require higher down payments or more points paid up front to qualify for the loan. The process of applying for a No Doc mortgage is simple: you will simply provide your name and social security number along with the details of your property and the mortgage lender will process your application based on your credit. There are three basic categories of No Doc mortgages:

No Doc Mortgages

The actual “No Doc” mortgage loan is the closest you will find to actually providing “no documentation.” To refinance with a No Doc mortgage you will provide the lender with general information about your home and existing mortgage. The lender will base their decision for approval almost solely on your credit rating.

Stated Income Mortgages

Stated Income Mortgages are also referred to as Low Doc Mortgages. These mortgages are a popular refinancing option with the self employed. To refinance your mortgage with a Stated Income Mortgage you will need to provide the mortgage lender you earnings going back two years. This documentation is usually provided in the form of tax returns, pay stubs, and bank statements. Because you are providing the mortgage lender some documentation to go by, State Income Mortgages come with lower interest rates than the No Doc Mortgage in the previous example.

No Ratio Mortgage Loans

This type of No Doc Mortgage is for the homeowner concerned about the privacy that does not want to disclose their income. This homeowner has excellent credit and employment history along with sufficient assets to approve the mortgage without providing proof of income. To learn more about your no doc refinancing options, register for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”

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If you are in the process of refinancing your mortgage, qualifying for the best interest rate is probably high on your list of priorities. Most Americans have blemished credit reports in one way or another; one in three Americans has poor credit all together. Having a blemish on your credit does not mean you have to settle for a bad interest rate, there are steps you can take to ensure you receive a competitive interest rate when refinancing your mortgage loan.

Clean Up Your Credit

The first thing you need to do before shopping for a mortgage is review your credit reports for errors. There are three credit agencies you will need to request records from: Experian, Equifax, and Trans Union. You can request records from all three agencies once per year by visiting the website annualcreditreport.com.

If you find errors on your credit reports you will need to dispute them with the corresponding credit agency and the creditor responsible for placing it there. Pay close attention to your history of on-time payments. Your credit score is heavily influenced by your repayment history. You will want at least six months of on-time payments on your record before you apply for a mortgage loan.

Organize Your Efforts

Before you apply for a mortgage you want to organize you documentation. Organization will save you time and frustration when applying for your new mortgage. You should gather together your tax returns from the last two years, your bank account statements, mortgage payment receipts, and the payoff balance of your current mortgage. The more you can document when it comes to your income and assets the easier it will be for you to qualify for a better interest rate. To learn more about qualifying for the best possible interest rate while avoiding common homeowner mistakes, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

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People decide to refinance their mortgage loans for many different reasons. If you are a homeowner considering whether or not to refinance your mortgage you should evaluate your reasons for doing so; here are three common reasons homeowners take the plunge and refinance their mortgage loans.

Get a Lower Monthly Mortgage Payment

Refinancing your mortgage loan is the quickest way to lower you monthly payment and keep more cash in your budget. The mortgage industry has so many new loan options available you should be able to easily tailor a mortgage loan to your financial needs. There are loan options available tailored to any financial objective from finding the lowest monthly payment to building equity quickly, even cashing out equity for any variety of reasons.

Consolidate Your Debts

Refinancing your mortgage to cash out equity and consolidate your high interest debts is an excellent reason to refinance. By consolidating your debts you will have one monthly payment to manage instead of juggling payments to multiple creditors. Refinancing your mortgage to consolidate debts does not eliminate your debt, it is simply a convenient method to pay back the debt and save money on finance charges. The interest you pay on the new mortgage becomes a tax deduction on your income taxes; this is a huge advantage over paying interest to credit card companies.

Safeguard Yourself from the Economy

If you financed your home using a risky adjustable rate mortgage, including an ultra-risky option or interest only mortgage, you might be concerned what rising interest rates will do to your mortgage payment. If you are coming to the end of your interest only period the lender will adjust your payment amount to include mortgage principle and adjust the interest rate. When this happens you can expect your monthly payment amount to skyrocket. By refinancing your mortgage to a fixed interest rate you will be safeguarding yourself from future interest rate hikes and economic uncertainty.

To learn more about your mortgage refinancing options, register for our free mortgage guidebook, “Five Things You Need to Know before Refinancing Your Mortgage.”

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