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Even homeowners with bad credit scores can take advantage of mortgage refinancing options to ease their financial burden amid the coronavirus pandemic.
The housing market is one of the only sectors of the economy to have seen a solid rebound during the Covid-19 crisis, in part thanks to market volatility that pushed mortgage rates down. The average rate on a 30-year fixed mortgage is now 2.81%, Freddie Mac said Thursday. ThisThis is the tenth time this year that the rate has reached an all-time high.
It has also sparked a refinancing frenzy from existing homeowners looking to capitalize on the new low rate environment and get a lower monthly payment or different loan terms. Currently, there are nearly 19 million applicants for refinancing in the market with an average potential savings of $ 297 per month, according to Black Knight, a mortgage research and technology company.
However, one of the barriers to refinancing a mortgage is the credit rating. Since mortgage refinancing pays off your existing loan with a new one, lenders want financially strong borrowers – many require a minimum credit score of 620.
But not all borrowers have good credit. Over 30% of consumers have a FICO credit score between 300 and 669, between “bad” and “average” ratings, according to Experian.
“No matter the credit, it’s always worth considering refinancing as an exercise in saving money over time,” said Lauren Anastasio, certified financial planner at SoFi, an online personal finance company based. in San Francisco.
1. Shop around different lenders
It makes sense that many borrowers are starting to research refinancing options with their old lender, Anastasio said. Because that lender has already given you a mortgage, they are more likely to help you refinance, she said.
But it’s also worth shopping for borrowers, according to Anastasio. Another lender may be willing to offer them a better rate, even with less than perfect credit.
2. Explore FHA loans
Borrowers should also explore Federal Housing Authority loans, which offer refinancing options with credit references of less than 600. These loans are federally insured and available from many lenders.
Those with an FHA Loan Can Reap the Benefits of the Program Simplified refinancing program, a faster and cheaper way for existing borrowers to get lower rates. Although you cannot take advantage of this program if you do not already have an FHA loan, you can still do an FHA refinance.
3. Refinance with cash or remove private mortgage insurance
Withdrawal refinance is “a huge tool in helping customers really get to a place where they have extra money and they can use it to pay off their debts,” said Lucy Randall, sales manager at Better.com online lender. She added that borrowers who own a good portion of their home equity usually benefit the most.
What this type of refinancing does is allow you to accept a loan with a greater principal balance than what you owe on the mortgage and withdraw the rest in cash. This can then be used to consolidate and pay off debt, do home repairs, or accomplish other financial goals, Randall said.
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Additionally, borrowers who previously had private mortgage insurance, or PMI, which protects the lender, can refinance to remove that insurance if they have accumulated more than 20% of equity in their home. Removing PMI can reduce monthly payments.
4. Go for VA options if you are eligible
Veterans have access to “what is arguably the most powerful real estate financing option on the market,” through the Department of Veterans Affairs loan delivery, said Chris Birk, vice president of the Department of Veterans Affairs. mortgage analysis, director of education for Veterans United Home Loan and author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits. “VA loans, like FHA loans, are insured by the federal government and available from many lenders.
Those with an existing VA loan can take advantage of the interest rate reduction refinancing loan, or IRRRL, and may be able to reduce their monthly payments without worrying about their credit rating, says Birk.
If you have a non-VA mortgage, you can refinance cash through the VA. Veteran loans can be a great option because they have built-in collection guidelines and lower rates in place to protect borrowers, Birk said.
If you are considering refinancing
Granted, these options may not be worthwhile for some borrowers, including those who may not be staying in their current home for more than a few years.
To assess whether a certain refinance rate will work for you, it’s important to include closing costs in your potential monthly savings, Anastasio said, as it can cost thousands of dollars to go through the process.
It is “important to know that you are going to be staying at home long enough to recoup the costs,” she said. Request a break-even analysis, which will show how long it will take you to recover your costs.
If you can’t find a refinance rate that makes sense, it’s probably a sign that you already have a good deal, according to Anastasio.
“Refinancing right now may make sense for the right person, but someone doesn’t need to feel like they should refinance for fear of missing out,” Anastasio said.
To make sure you’re getting the right refinance for you, find a lender you trust who will take the time to walk you through your options and explain them to you, Randall said.
If, as a client, “works with someone with a good reputation and they feel good about the transaction and are in a better financial position, that is really all that matters,” said Birk.
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