Interest rates have lingered at 60-year record lows for some time now, allowing millions of homeowners to refinance their mortgage loans. Interest rates have declined with such consistency that thousands of homeowners have refinanced more than once. However, many homeowners are still hesitant to do so, below are ten possible reasons why:
1. Credit Score: Whether you are refinancing your home or buying a home, mortgage lenders focus on your credit score. You will need a score of at least 740 to get the best interest rate possible. If your current credit score is low, you can try to refinance with the Federal Housing Administration (FHA). The FHA has a minimum credit score requirement of 580.
2. Equity: Many homeowners have not recovered equity lost when home prices tanked six years ago during the housing market crash. In the past, homeowners with little equity did not possess much bargaining power; however, those with little or no equity may now have the advantage. The government’s Home Affordable Refinance Program (HARP) was designed to help underwater homeowners refinance their mortgages. The expansion of HARP 2.0 means that there are no underwater restrictions to qualify.
3. Mortgage Insurance: Homeowners who put less than 20% down when they bought their homes are required to pay lender’s mortgage insurance. If you have been told that you cannot refinance because of mortgage insurance, this is not true. It may be more difficult, but not impossible. You can qualify for HARP whether you pay mortgage insurance or not.
4. Debt-to-Income Ratio: Many homeowners have been forced to rely on credit cards over the past few years, as a result of the recession. Your debt may have piled up to the point that your debt-to-income ratio is too high to refinance. Your best bet is to focus on paying down your debt before trying to refinance.
5. A Low Appraisal: If your appraisal was lower than you anticipated, it is possible you will be rejected for a refinance. However, a low appraisal does not mean that your property is not valuable. You may need to challenge the low appraisal or renegotiate the deal with your lender.
6. You Think You Are Too Old: If you are retired or close to retirement, you may think refinancing is not worth the trouble. Before ruling out refinancing your mortgage, look into shorter-term loans that might be better for you.
7. Low Income: Even if you are making less money than you were at the time you bought your home; your lender will take into consideration that you have managed to keep current on your home loan. You may also want to look into HARP 2.0, which requires proof of employment and proof that you are making your mortgage payments.
8. Cannot Afford It: Refinancing fees cost approximately 2% of your loan amount. The closing costs, appraisal fees and credit checks will likely cost you a few thousand dollars. Also, beware of “no-cost” refinancing. Lenders that offer these deals will charge you a higher interest rate.
9. Unable to Document Income and Assets: You may think as long as both, your credit score and home value are in check, you can get approved for a refinance. However, you will need proper documentation of your income, assets, deposits and tax forms. If you cannot provide this paperwork, your refinance will likely be rejected.
10. Not Worth the Trouble: Refinancing your home is not a fun or easy experience. Many homeowners today avoid refinancing simply because it is not worth the trouble. Rather than ruling out refinancing altogether, look into streamlined programs that provide a simple and quick refinancing option.
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