Should I Refinance My Mortgage and Do I Qualify


With interest rates on 30 year fixed-rate mortgage loans falling below 4%, the lowest level since the 1950s, many borrowers are keen to refinance their home loans and other mortgages. By any long-term measure, current rates are a great deal and could result in tens of thousands of dollars in savings over the life of the mortgage. However, getting these low rates (and big savings over the long term) is not so straight forward. Most banks are much stricter on their lending criteria and only those with excellent credit and equity in their homes will get access to these record low rates. Here are the some of the main considerations and hurdles you think about when refinancing your mortgage:

You must have a Credit Score greater than 720

To get the lowest loan rates, you’ll need an excellent FICO credit score (720 or higher). You should obtain your credit score before you apply for a mortgage from FICO itself or at one the three main credit bureaus: TransUnion, Equifax or Experian. (Note: Your annual free credit report from, does not give you your credit score).

Once you’ve received your credit reports, check them for errors that could hurt your score. Make sure you contact the agencies and credit bureaus if you notice any errors so that they can get fixed, which can result in an improved credit score. If you have large credit card balances, you can raise your score quickly by paying them off. Your “credit utilization” ratio, which reflects to the amount you’ve borrowed as a percentage of your available credit, accounts for 30% of your credit score.

Must have at least 20% home equity

Ideally, you should have at least 20% equity, based on your home’s current appraised value (not what you bought it for). If your home has dropped in value, and your loan is greater than the value of your home (i.e. you are underwater on your home) you will almost certainly be unable to refinance

Homeowners with less than 20% equity may still be able to refinance, though the cost of doing so may be higher because of the need to buy private mortgage insurance (where available). Private mortgage insurance protects lenders against default, but the cost of obtaining this insurance may wipe out any savings from refinancing.

Investment homes are also much more difficult to refinance, even if you have 20% equity in them. Some reports say banks are asking for as much as 50% equity in order to refinance investment properties, on which loan rates are almost half a percent higher then home mortgages. Which means that unless you plan to hold the investment for a 10 year plus time frame, the cost of refinancing may not be worth it.

No other mortgages or lines of credit

If you have a home equity loan or line of credit, you’ll probably need to pay it off before refinancing, which means you need to do a cost/benefit analysis of whether refinancing makes sense for you. Before a lender will refinance your first mortgage, it typically needs approval from the lender that holds your second mortgage. The lender with the second must agree to “subordinate” the loan, which means it will take second place behind the new first mortgage. However, due to the credit crisis many lenders are refusing to subordinate their loans – making refinancing hard for a number of people who used their home as an ATM (line of credit) during the boom times.

The other thing to consider with your mortgage is whether it is above or below the national conforming limit amount – $417,000. The lowest rates are limited to the conforming loans because government-sponsored mortgage giants Fannie Mae and Freddie Mac will buy them in the secondary market. That makes those loans less risky for lenders. In some instances, Mortgage GSE’s Freddie and Fannie also will purchase loans above the conforming limit (per recent legislative changes), but these will have higher rates due to the higher cost of insuring them against default.

Borrowers may satisfy the above points, but still may not qualify for the lowest rates, because the interest rates for loans that exceed the conforming limit (known as jumbo loans) have remained high. The average jumbo rate for loans greater than $625,000 is about 1 to 2 percent higher than conforming loan rates, according to

Employment & Other Factors

With the tough economic environment, many lenders are also being much more critical in verifying income and one’s employment situation. If you are in a job within a shaky industry or is “at-risk” according to bank classifications you may get knocked back when looking to refinance your home. Also, if you are planning to move or even pay off your loan within the next few years, refinancing probably makes little sense because you won’t be paying monthly bills long enough for the savings to cover the refinancing costs.

Finally, it make take time to actually process your refinancing request. In a normal market, refinancing makes up 50% to 60% of a mortgage broker’s business. However, with new loans drying up, for many brokers 90%+ of their business is now refinancing and with the stricter criteria in place, it may take much more time to get the necessary approvals. So have patience and keep working on building your credit score and home equity while you wait.

When is Refinancing worth it?

Generally speaking, if you can earn the refinancing costs (normally 1%-3% of the loan value) back within two to three years, and it’s a home you’re prepared to stay in for much longer than that,  it’s usually a good option to refinance your mortgage. From a risk perspective if you have an adjustable rate mortgage, refinancing to a low 30 year fixed rate may also be a good idea because it will ensure your repayments never skyrocket and place you under financial duress.

Also, never blindly trust mortgage brokers who will give you life-of-loan refinance savings calculations that may not factor in the taxation implications (mortgage interest is tax deductible). Also, consider the opportunity cost of refinancing. Could you make more by putting that money into other investments? You can search on-line for a number of refinancing calculators and do the numbers based on your own personal situation. So do your homework before looking to refinance and like any financial product or service always shop around to get the lowest fees and best rates

~ Home Price Declines Catching up Globally
~ Leverage 101 – The Real Cause of the Financial Crisis
~ Second Mortgage Write-off Relief Coming Soon

References : WSJ, USA today

Leave a Reply

15 Comments on "Should I Refinance My Mortgage and Do I Qualify"

[…] up after falling to multi-year lows. However on the flip side, new home buyers or those looking to refinance are seeing mortgage interest rates rise from historic lows. On Wednesday the WSJ reported that […]

[…] ~ The Best FDIC insured High Interest Saving Accounts with Good Yields ~ Should I Refinance my Mortgage and Do I Qualify ~ A look at the Pros and Cons of Reverse Mortgages ~ HSBC versus ING Direct high interest online […]

[…] payments go up by hundreds of dollars a month as adjustable interest rates rise. The first step in refinancing an adjustable rate mortgage is to contact your mortgage company. Depending on where you live, […]

Existing and Proposed Government Housing Refinance Programs | Saving to Inve$t

[…] being reviewed in Congress, that I am also tracking on this blog. I have written a number of refinancing related articles recently and while the current low rates provide an amazing deal, remember that […]

[…] and a willingness to document your income in order to qualify for those great rates, if you can qualify at […]

[…] morale of this story is that it is a good time to refinance if you can get a lower rate and afford potentially higher extra monthly payments. There are a […]

[…] risky for these families because apart from the difficulty of managing repayments on one income, refinancing to a 30-year loan may not be possible if the job loss causes their personal finance position to […]

[…] Package ~ Help for Unemployed and Under Insured Workers (COBRA) in the Economic Stimulus Package ~ Should I Refinance my Mortgage and Do I Qualify ~ Taxes and my Paycheck More Related posts:Alternative Home Loan Modifications Outpacing […]

[…] 1. Continued support of the GSE’s – Freddie Mac and Fannie Mae. These two firms, along with the FHA, back close to nine of 10 new home loans today. Following their collapse and entry into government enforced conservatorship these two government sponsored entities (GSE’s) together have asked for about $164 billion of tax payer support. While the public and most politicians want to end this support and dissolve the firms sooner rather than later, it is unlikely to happen against the current housing market back drop. In fact with home prices falling and the private sector not picking up the slack, these two mortgage giants are likely to stay in place to support the housing market. While this is bad news for tax payers, it does create lower rates for home buyers and those looking to refinance. […]

[…] people to refinance or get new loans at this rate. However, this assumes that people will meet the criteria to get this new […]

[…] ~ Should I Refinance my Mortgage and Do I Qualify ~ Record Home Price Drops May Signal Housing Market Bottom ~ FHA vs Conventional Home Loan – […]

Jeremiah M. Wean

A consumers FICO score has become a very important determinant of whether they will get a loan or not. Also, now with Fannie Mae and Freddie Mac, issuing loan level pricing adjustments it’s important to ensure that you have the highest credit score possible. As you say it is important for a consumer to check their credit. Unfortunately, a lot of consumers have incorrect information on their credit report. It is important to get this cleared up before applying for a mortgage.

[…] References : Bloomberg Related: ~ FHA vs Conventional Home Loan – Comparing the Difference ~ Should I Refinance my Mortgage and Do I Qualify ~ Top ten myths about buying a franchise // More Related posts:New Bills for 2010 Home […]

[…] Should I Refinance my Mortgage and Do I Qualify ~ 10 things to know about your Credit Score ~ Getting Cash Quickly ~ Are you using these 10 online […]

Consumer debt

>Lenders may use the FICO score is a main deciding factor in your interest rate and loan amount, but they also consider the length of time at your job and home as well as your debt to income ratio. The debt to income ratio is a fairly big factor and is your monthly recurring debt (excluding things like phone, electricity etc) divided by your monthly gross income. Ideally if this amount is above 28% your interest rates may not be the best; above 36% and you’ll most likely be offered a poor interest rate.


Previous post:

Next post: