Mortgage Refinance Guide

Refinancing with cash back can be an excellent way to borrow against your home’s equity. In today’s economy a second mortgage could be a better choice. Here are some of the advantages of taking out a second mortgage on your home.

Borrow against Your Equity

If your current mortgage already has a low interest rate a second mortgage will be a better option than refinancing to a higher interest rate. Second mortgages usually come with fewer fees than refinancing and can be paid back sooner.

Refinancing is expensive, especially when interest rates are rising. The costs involved in refinancing your mortgage require you to stay in your home for at least two years to recoup those expenses. The advantage of a second mortgage is that you will not have to pay these fees or worry about recouping your losses.

Home Equity Line of Credit

If you use a home equity line of credit you will have access to your equity over a period of several years. This money is available to you by writing a check, using a debit card, or by requesting an electronic deposit. The advantage of a line of credit is that your finance charges are based only on the amount you spend.

Easier Approval

You may find it easier to qualify for a second mortgage then to refinance your current mortgage. If you have less than desirable credit consider a second mortgage for your home equity over refinancing and taking cash back.

Common Homeowner Mistakes

Second mortgage loans are not for every homeowner. Carefully plan your budget so you do not become overextended and unable to make your payments. Your second mortgage is secured by your home just like your primary mortgage; if you fall behind on the payments your lenders could foreclose and take your home.

Borrowing too much equity could result in your lenders requiring you to purchase Private Mortgage Insurance (PMI). Private Mortgage Insurance can add hundreds of dollars to your monthly payment and does nothing for the homeowner; PMI only protects the lender from loss due to foreclosure. You can learn more about your mortgage options, including how to avoid common mistakes, by registering for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

If you are planning on refinancing your mortgage loan you need to do your homework to avoid making costly mistakes. Doing your homework and researching mortgage lenders will ensure you do not overpay the finance charges on your new mortgage. Here are tips to help you avoid making these mistakes.

Get Your Finances in Order

One of the biggest mistakes homeowners make before refinancing their mortgage is not staying on top of their finances before applying. Having your mortgage application denied because you haven’t reviewed your credit and organized your paperwork will cost you money. You will need to request copies of your credit reports from the three credit agencies and carefully review these records for errors. If you find errors you need to dispute them with the creditor and the credit agency. If your credit score is not where it should be you will need to improve it before applying for your new mortgage. You can improve your credit score by paying down the balances on your credit cards and making sure all of your payments are made on time.

Neglecting to Shop Around

Mortgage offers are easy to come by; however, if you want the best deal for your loan you need to do some legwork. Comparison shopping for a mortgage means carefully comparing all aspects of the loan including closing costs, not just the interest rate or Annual Percentage Rate. The amazing mortgage deal you think you’ve found could turn out to be a nightmare after you examine the fine print.

You can learn more about avoiding common mortgage mistakes by registering for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”

If your credit score is not where you would like it to be there are steps you can take to improve it. Improving your credit score will improve the interest rate you qualify for when refinancing your mortgage or taking out a home equity loan. You should work on improving your credit score at least six months before applying for a loan; improving your credit score will not happen overnight. Here are tips to help you get started.

Pay All of Your Bills on Time

Your credit score is derived from a number of factors; however, a large portion of it is dependent on your history of on time payments. You need to have at least six months of on time payments on your record before you start applying for a loan.

Pay Down The Balances on Your Credit Cards

Keeping the balances on your credit cards low will help lower your debt-to-income ratio and improve your credit score. You need to pay the balances down, not simply consolidate your debts under one card.

Avoid Opening and Closing Accounts

Having fewer credit cards will help your credit score; however, if you open and close too many accounts in a short period of time you could damage your credit score.

Use Credit Responsibly

Avoiding making major purchases before you apply for a mortgage or home equity loan. Running up the balances on your credit cards is also a bad idea. If you have a poor credit score the sooner you get started improving your financial situation, the closer you will be to a better credit score.

Review Your Credit Records

Make sure you review your credit history from each of the three credit agencies before you start applying for loans. If you find errors on your credit records you will need to dispute the errors.

Mortgage lenders use your credit score to determine how much of a risk you are for lending. Your credit score is calculated by the Fair Isaac Corporation, also called FICO, and is based on the contents of your credit reports. Your FICO score is based on a numeric scale; if your score is less than 620 you are considered having bad credit. If your score is between 620 and 650 you have good credit, and finally, if your credit score is above 720 you have excellent credit. Credit scores are not the only factor mortgage lenders consider when evaluating your application; lenders also look at your income, assets, and debts before approving your mortgage application.

If you have bad credit and your score is less than 500, you can still be approved for a mortgage. Credit scores below 500 may be limited to “sub-prime” mortgage lenders; these are lenders that specialize in writing bad credit loans. These bad credit mortgages come with a much higher price tag: lender fees, interest rates, and points are all much higher on these loans. A mortgage broker may be able to help secure financing for you if you have a low credit score.

It is important to review your credit reports before applying for a mortgage. Errors have a disastrous effect on your FICO score and you need to dispute them and have the errors removed before applying for a mortgage. Late payments also damage your credit score; it is important to have at least six months worth of on time payments before shopping for a mortgage loan.

Not all mortgage lenders use the FICO score to approve mortgage applications. Alternatives to FICO include Scorex. It is not uncommon for mortgage offers to vary widely from one lender to the next based on different credit scoring systems. You can learn more about how your credit affects your mortgage by registering for our free mortgage guidebook, “Mortgage Refinancing: What You Need to Know.”

Jumbo mortgages are loans for amounts higher then limits set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are charted by the Federal government to supply financing for mortgage lenders. This limit set for conventional mortgage lending is $417.000 in 2006 for a single family home in the mainland United States. If you had been avoiding refinancing your mortgage because you were over the conforming limit, now is the time to refinance with a traditional mortgage.

Non-conforming or “jumbo” mortgages have higher interest rates than traditional mortgage loans because there is more risk for the lender. The 2006 limit for conforming mortgages is significantly higher then in previous years. The state of the housing market is to blame; however, homeowners with a jumbo mortgage stand to save a lot of money by qualifying for traditional financing under the new limits.

There are expenses involved with refinancing. You will need to stay in your home long enough to recoup these expenses in order to make refinancing worth while. A general rule of thumb is to plan on staying put for at least five years to fully realize the savings from refinancing your jumbo mortgage. When you close on the new mortgage loan you will have to pay most of the same expenses you paid when applying for your original mortgage. These expenses include application fees, lender fees, legal expenses, and closing costs.

When refinancing your mortgage you will need to shop from a variety of mortgage lenders to be sure you do not overpay for these expenses. When shopping for your new mortgage, make sure you compare all aspects of the loan offers, not just the interest rates. Comparing the Good Faith Estimate from each lender will allow you to identify which is the best mortgage offer.

To learn more about shopping for the best mortgage and how to avoid common homeowner mistakes, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”