Should you refinance to become more lendable?

Most families who own homes generally don’t want to refinance unless they can lower their interest rate, pay off debt, consolidate obligations, and/or fix up their homes. Those are all tangible benefits associated with refinancing your home. There are some other things you might want to consider particularly if your situation has some financial obstacles…

If for example you have consumer debt, credit cards, or student loans and your credit score is anything less than 680. The objective would be to get an affordable mortgage on a conventional loan without private mortgage insurance. This would support the lowest possible cost of homeownership monthly. If however, your credit score is in the 620 to 640 range, you carry consumer debt and you have a mortgage of around 3%. The total debt obligations along with your mortgage is 11%  assuming a blended average. If you can refinance into a 6% 30-year fixed-rate mortgage, your cost of funds drops by 5%.

The opportunity is to become more credit-worthy. Maybe that means cash-out refinancing to consolidate debt i.e an FHA Loan. Doing so would drive your credit score up from say 640-680 or higher which absolutely can occur. Assuming you have the equity, you would line yourself up for a later conventional refinance potentially 6-8 months later to drop the PMI and hopefully the interest rate at the same time. Even if rates in the future remain at the level they are today, such a strategy would still benefit you. Remember you’re going to pay extra fees and rates in particular for the credit score you have today. A lender cannot look at the credit score tomorrow that hasn’t happened yet and give you rates from pricing based on that. So you close the loan today with the credit score you have focusing on the debt picture to make you more lendable. Then in 6-8 months, the lender can subsequently take your loan off the shelf so to speak & lower your monthly payment.

Don’t be fooled by the credit card companies offering you 0% interest which contains high monthly payments. It’s important to work with a lender who understands the mechanics of debt and income allowance. If you’re looking for a mortgage to get pre-qualified for a home or just want to understand what you can afford start today by getting a no-cost loan quote!

 

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