Refinance Loans
Required Minimum Credit Score to Secure a Refinance Loan
There is no simple answer to what kind of credit score you need to secure a refinance loan. Obviously the higher a credit score the better chance but it also depends largely on the kind of refinance loan you are a seeking. While there are still programs available for people with scores below 580, they are becoming rarer and rarer. The minimum credit score you will need for a home refinance loan from Freddie Mac and Fannie Mae is 620.
Remember though, your credit score is only one part of the equation. Every refinance loan lender wants to see three things from any potential customer:
- Steady income
- Debt-to-income ratio that is 35% or lower
- Clean recent credit
Having these three things in addition to a higher credit score will certainly bolster your chances of getting a refinance loan. Still, if you are like 30% of Americans with bad credit and you need to get a refinance loan, you should read our section on How to Secure a Loan with Bad Credit.
How to Figure Out Whether to Refinance Your Home
For some homeowners this is a very simple question to answer. If you are stuck in a double-digit mortgage while rates are currently below 8-percent, there’s no question you will save a lot of money over the long run. Even if you refinanced only a couple of years ago, getting a refinance loan probably makes very good sense if interest rates have fallen even a point or two.
Other homeowners may find this question not so easy to answer. In such a case, you may want to consider some other factors to help weigh your decision.
- You want to compare interest rates in order to figure out how much you will save on monthly homeowners payments based on the life of the mortgage. For example, locking in a 7-percent rate versus one at 8.5-percent will save an average $100 per month over the life of a 30-year loan. An amortization chart will give you an even more precise idea of the difference.
- Be sure also to factor in points, title insurance, closing costs and other expenses associated with a refinance loan. Sometimes lenders will offer a slightly higher rate mortgage with almost no up-front fee, points, or closing costs. This option is ideal if you expect to sell or refinance in a few years but something to avoid if you plan to keep the house for a long time.
- Take the difference between you current mortgage payment’s after-tax coast versus your new payment’s after-tax cost. The IRS gives homeowners a tax break on mortgage interest, about $.15 to $.31 of every interest dollar paid but this will depend on your tax bracket. If you take what you pay annually in interest and multiply it by .15 to .31, you can figure your current tax savings. If you then multiply your new loan’s interest by the same number you can figure out how much savings you will see.
- Make sure you also compare rates and fee between various lenders including your current mortgage servicer.
- Consider switching from thirty-year to fifteen-year mortgage, which may allow you pay the loan off in half the time without increasing your monthly payment too much.
Mortgage lenders must adhere to strict federal and state guidelines dictating the percentage of the current home value they can lend. In general, you can refinance if your home is worth 10-percent more than the new loan amount.
Refinancing Your Automobile Loan
Few people know it but auto loan refinancing is one of the best kept secrets for saving money. Most people don’t even think of refinancing their auto loan. When you refinance your auto loan, you pay off your current loan from a different lender with a lower annual percentage rate (APR). This means refinancing your auto loan drops your monthly auto loan payment lower, dropping your interest rate, and allows you pay off the auto loan balance even quicker.
Auto loan refinancing is becoming more and more popular as interest rates drop. Bear in mind, your current lender is unlikely to refinance its own loan so you will have to find a new lender. Also, unlike refinancing your home you don’t need to get an appraisal to refinance your auto loan. Refinancing you auto loan is based on how much you have remaining on your loan instead of the equity in your home.
