Top 10 refinancing reasons

Here are the "Top 10" frequent home refinance reasons:

1. Reduce the current morgage interest rate and lower the monthly mortgage payments;
2. Take out tax-free cash from home equity for personal use;
3. Combine a first and second morgage into one mortgage with lower total payment;
4. Pay off other loans that have high nondeductible interest, such as credit card and auto loans;
5. Eliminate costly private mortgage insurance (PMI) premiums;
6. Get rid of an unpleasant lender, such as one who doesn't promptly credit payments or messes up the escrow impound account;
7. Switch from an adjustable-rate mortgage to a fixed-rate mortgage;
8. Finance home improvements, such as renovation or a family room addition;
9. Cut interest costs and speed up loan payoff by switching to a 15 year- mortgage;
10. Borrow on the home to start or buy a business or to expand a current business.

Credit report and FICO score

Before "dialing for dollars" to mortgage lenders, the best way to start home mortgage refinancing is to check your credit report and FICO score. Most lenders use some form of credit scoring to qualify borrowers. Unless you have a FICO score of 620 or higher, refinancing will probably be expensive. Most lenders use the FICO (Fair, Issac and Co.) score that considers your debt-payment history and whether you've been on time or late (the most important criteria)and the total amount of credit available to you (even if you pay off your credit cards each month.)

Another consideration is how many credit inquiries you had within the last six months. Surprisingly, your income is not part of the FICO calculation, which credits the probability you will default on a loan. Researching this article, I invested $12.95 to obtain my credit report and FICO score at www.myfico.com Instantly, I received my Equifax (one of the "big three" credit bureaus) credit report, my FICO score and explanation of how I can improve it.

My FICO score is 759. The report says: "Compared to the national population, your FICO score is in the 64th percentile. As a result credit will likely be readily available to you, often at attractive rates."

The report then explains the areas where I did not score well:
1. Too many credit cards (I love earning those frequent flyer miles);
2. High proportion of revolving account balances (which are paid off each month);
3. Lack of installment loans (other than real estate, I don't have any installment car loans or furniture loans); and
4. Too many accounts.

If your credit report reveals errors, the explanation tells how to correct them.

New conforming loan limits

Fannie Mae and Freddie Mac, the nation's largest home loan lenders, recently announced, effective Jan. 1, they will buy home loans up to $300,700. This is up from $275,000 in 2001.

The result is home loan borrowers up to $300,700 will get the lowest interest rates available. Loan limits for FHA mortgages also were recently increased but not nearly as high.

If you want to refinance with a larger mortgage, you will pay a slightly higher interest rate. The reason is Fannie and Freddie can't buy your mortgage, so the resale secondary mortgage market is more limited.

Should you want to refinance a small amount, typically less than $100,000 many mortgage lenders prefer you go elsewhere because their fees are limited on these small mortgages. That happened to me a few months ago. I wanted to refinance my second-home condo to pay off its 9 percent interest rate $16,000 mortgage.

The easy solution was home equity credit line up to $100,000 at the prime rate (currently 5 percent). A friendly source is www.wellsfargo.com The lender is in Arizona, I was in California, and the condo is in Minnesota. The loan papers were sent by FedEx for me to sign. In less than two weeks, my old mortgage was paid off, and I had a new equity credit line.

Which lender is best?

Personally I have had good and bad experiences with all types of lenders. Let me explain.

Mortgage brokers. These lenders are "middle persons" between the borrower and the actual mortgage lender. Mortgage brokers originate about 60 percent of all home loans, but they do not actually loan their own funds.

Mortgage brokers take the loan application, "package" it and "shop" it among several home loan lenders to find the best deal for the borrower. I've seen them perform "mortgage miracles" by placing home loans, for former tenants, with obscure lenders I've never heard about.

But I've also had mortgage brokers promise me wonderful mortgage terms, which I later learned were never available, just to get my loan applications. Mortgage brokers seem to be the most creative for charging last-minute highly profitable "junk" or "garbage" fees, such as administration fee, processing charge, documentation fee, underwriting fee, warehousing fee and many more.

Direct lenders. Direct mortgage lenders loan their own funds. However, they usually immediately resell mortgages into the secondary mortgage market, keeping the loan origination fees and retaining the loan servicing charges.

These direct lenders often retain some of their mortgages (called portfolio loans) and resell others in the secondary mortgage market.

A drawback is if your loan situation doesn't fit one of the direct lender's loan formulas, you probably won't be able to obtain a mortgage with that lender. Some direct lenders' loan and borrower qualification flexibility is limited.

Mortgage bankers. The third category of mortgage lenders is a hybrid of mortgage brokers and direct lenders. Mortgage bankers lend their own money. But thy usually quickly resell the home loans they originate in the secondary mortgage market. They often have buyers for a wide variety of creative mortgages. The major nationwide mortgage banker is Countrywide, which has both local offices and a Website at www.countryside.com. My personal experience with mortgage bankers has been both excellent and "not so good."

Avoid loan-fee points

In addition to avoiding unnecessary junk or garbage fees, refinancing homeowners should avoid paying loan-fee points. The reason is such refinancing fees are tax-deductible only over the 15- or 30- year life of the refinanced mortgage.

A better alternative is to ask for a "no-cost" or "low-cost" refinanced mortgage without loan fees. Be sure to study the good faith estimate, which each lender must provide you within three days after your written loan application submission. Compare the annual percentage rate (APR) of each mortgage offered. Look for any loan fees or junk fees that were not clearly disclosed.

The right time to refinance

Forget the old rule that homeowners should refinance when they can reduce their interest rate by 2 percent or more. There are no rules for refinancing today.

(This article is from the South Bend Tribune)

Information deemed reliable, but not guaranteed.