What You Need to Know When You Refinance a Home Mortgage Loan

By Tim Marose

The mortgage industry has changed significantly over the last two years. The ability to refinance your home loan has become more difficult even for those with a good credit rating. Many homeowners that are attempting to take advantage of historically low interest rates are finding that there are more hoops to jump through than in years past, and lenders have been denying borrowers for credit scores, home values, loan to values and a variety of other reasons. Here are some important things you need to know before you call your mortgage broker to check on rates.

You will need to have very good credit scores to refinance your home loan. In years past, any score above a 660 was considered to be excellent and few lenders if any would scrutinize a score in the high 600's. Now, in order to qualify for the best programs, lenders are looking for credit scores 740 and higher. Many borrowers are denied loans due to scores in the low to mid 600 range, and most lenders will not work with anyone below 620. Lenders will also charge higher rates for borrowers with credit scores below 720. Start your refinance process by getting a copy of your credit report and work on paying down debts and having erroneous information removed. It can be a tedious process, but a costly step to skip.

In order to refinance your home loan, you will need to be patient. Refinance activity has increased significantly, and new home buyers are eligible for an $8,000 tax credit, so many lenders have been very busy. In addition, many lenders downsized personnel in 2008, so they physically don't have to manpower they did in the past. In addition, underwriters are scrutinizing all mortgage applications, so very simply, the process will take much longer than in the past. Expect a 30 to 45 day time frame to refinance your mortgage loan. Know this before you start the process and don't expect your lender to be able to streamline the process.

You must accept the fact that your house has decreased in value over the last year. The value of a home will determine what mortgage programs and products you will qualify for. Regardless of how much you have paid for the house, the value will be determined by what comparable houses in your direct neighborhood or area have sold for. You can get a good idea of what your home is worth by finding out what similar houses have sold for in your neighborhood in the last 6 months. Lenders do not like using comparable home sales older than this time frame.

When it is time to refinance, you will likely have to pay points. In years past, most lenders were offering all loans with zero points, but times have changed. Paying points can offer you a significantly lower interest rate and may help you save thousands in the long run. Talk to your mortgage broker to find the "break even" point on points. In other words, how long will it take to pay back the cost of points. It may make sense when you try to refinance your home loan.

Taking cash out is more expensive than a rate and term refinance. Lenders realize that taking equity out of your home puts them at more risk, and they will charging you more money to do so. Expect to pay 1/8 to 1/4 percent higher if you want to take more than $2000 cash out of your home. You will also be limited to a maximum of 85% of the value of your home. You will also need to have a relatively high credit score in order to use the equity in your home.