With mortgage rates dropping to record lows, it's no surprise that more and more homeowners are looking to refinance. But while some borrowers will be able to turn these compelling rates into real savings, not everyone can get in on the action. To better understand the refinancing process, here are five things you need to know to refinance in today's market.
1. Despite the attractive rates, you will have to thoroughly review your financial position before determining whether or not now is the time to refinance. A good rule of thumb is if your mortgage rate is a full percentage point or more higher than current rates, you should consider refinancing. If your rate is above 6 percent currently, then it is a good time to think about it.
2. While 720 is still considered by some to be a solid FICO score, it's not good enough to obtain the best rates in today's refinancing market, Instead, borrowers will need a FICO score of at least 740. "FICOs are everything," Borrowers that don't have this score can still refinance, but they will face higher rates, which may make refinancing not make sense.
3. Home equity can be another significant barrier to refinancing today. Zillow says roughly one in seven American homeowners actually have negative equity-meaning they owe more on their mortgage than their property is worth. In order to qualify for refinancing, homeowners will have to have a minimum of 3 percent equity in their homes. In addition to solid credit and home equity, you will also need to be able to document income in order to qualify for refinancing.
4. Loan fees lenders charge are another major consideration. Costs to refinance can be 2 ½ to 3% of your loan amount. The fees that you should be paying need to be low enough so that you can recoup your money through the break in the interest rate in a reasonable period of time-usually under four years. If you are planning on moving in a short time then it may not be cost effective to refinance. Borrowers have three main options for paying such fees. Those with enough cash may want to just pay the fees up front. Borrowers with less cash on hand may be able to opt for a higher interest rate instead of paying the fees. A third possibility is to have the fees tacked on to the principal of the mortgage. The key is to chat with your mortgage professional about structuring the fee payment so that it makes the most economic sense for you.
5. Be patient: The wave of refinancing applications comes amid a period of significant downsizing in the lending industry. That means there are fewer employees on hand to handle the surge in business. As a result, expect slower turn times. It can take 20-30 days to know if your loan has been approved. It can take up to 45 days to complete the entire transaction.
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