Question: I did not pay one mortgage rate on time, and the lender informed me that I’d have to wait a year from the date of this late payment before being able to refinance the mortgage. I have a 690 credit score and no other late payments. This is my second year on an adjustable rate mortgage with 3.5% interest rate. I want a cash-out refinance to pay off bills and make some home renovations.
Answer: The current 3.5% interest rate that you are paying is a low one, and there are high chances you won’t get a better one, not to mention that there are refinancing costs. From what you’ve mentioned, the purpose of the refinance is to get cash out of your home. You are not trying to lower the interest rate.
However, the recent late payment on your home loan prevents lenders from approving a refinance loan. Lenders want to see your current loan paid on time, every month, because this is the very loan that you want to refinance.
Now, let us assume that your refinancing application is approved. Even if this happens, you will get a higher interest rate than the one you have at the moment. This is due to your credit score. Borrowers with not so great credit scores get less advantageous loan terms. And although rates are low on the market, you will not get one better than what you already have.
With a higher interest rate, you will bleed money over the long run. The adjustable rate loan already gives you a very low rate for a preset period of time. You did not mention the term, but I’m guessing there will be seven more years of this fixed low rate. You can take advantage of this offer while you still have it. It’s not something to throw away!
In case you get a cash-out refinance, you’ll be stuck with a higher monthly payment (if the interest rate remains the same) and some on top of that in the near future. There may be other options available to you besides the cash-out refinance.
Speak to lenders and mortgage brokers in your area to get more information on their offers. It is not easy to get a cash-out refinance these days, and there may be alternative solutions. Get a credit history report from the AnnualCreditReport.com and show it to various lenders. Do not give your Social Security number every time you have a discussion about your mortgage options. The report provides enough specific information for you to get all the details you need.
Home values have increased and you considered a cash-out refinance in the new market context. However, if your home equity is lower than 30%, you will be turned down by lenders in all likelihood. The refinancing ability or getting an equity line of credit becomes easier when you have more substantial equity in your home. Talk to a loan expert about these specifics.
As word of advice: don’t cancel or cut up credit cards that you are no longer using. Having those lines open could help with your credit score. Credit report bureaus analyze the way borrowers manage their credit lines over longer time periods. The longer you have the credit card account (even if unused) the better your credit score. The credit utilization ratio is very important for these cards. Credit bureaus check your current borrowed amount against the total credit available. And if your debt is low, that’s good for you!
Let’s say you could borrow $10,000 on all the credit card accounts. And you now owe $5,000 of this amount. This means you’ve used 50% of the credit available. But if you cancel those unused credit cards, the total amount you may borrow drops to $6,000 from $10,000. And for the same owed amount ($5,000), your debt level would be very high. Hence the bad credit score and the impossibility to refinance.
Before you are scored well, you need to prove that you are using a lot less than what you have available on the credit cards.
Last but not least, your credit score will improve if you continue to make payments on time and pay down your highest interest debt. Then, you’ll be able to obtain additional credit.