These days, when considering refinancing a home loan, have all your ducks in a row before approaching any lender to apply for a refinance.
Those "ducks" include the following:
- Make sure that you can show a steady income stream. Nowadays, given high rates of unemployment, lenders do not want to extend credit to anyone who can't show the ability to make that monthly mortgage payment. Copy at least several years of tax returns and your W-2s to show the lender your employment history. If you're self-employed, it's going to be even harder. Make sure that your 1099s match your reported income.
- Check your credit report. Make sure that your FICO score is high enough to make you attractive to a lender for refinance. A credit score of 750 is good; above 800 is even better. The higher the score, the better the chance for refinancing.
- Pay down your credit card debt; even better, don't have any! If you have car loans, student loans, and/or credit card debt, and you've been paying only the minimum, the chances are that the lender will take a pass on refinancing.
- Make sure that the value of your home supports refinancing. Right now, with so many homes "underwater" in terms of their value - that is, the existing mortgage is more than the house if presently worth - lenders are very skittish. Will housing prices go back up? Will they continue to decline? Nobody knows. Lenders like predictability. They don't want to lend if they think that the refinance will cost them money. Right now, lenders are usually demanding at least twenty percent down. The days of "zero down" are over. You'll have to search hard for a lender who will accept less than twenty percent down. They may be out there, but they are not easy to find and may be more expensive.
- Why do you want to refinance? If it is to take money out for college tuition, a vacation, pay off credit cards, or anything unrelated to the house, you may find it even more difficult to refinance. If it is to lower the interest rate and adjust the term of the mortgage (for example, from 30 to 15 years or vice versa), use one of the many mortgage calculators on line to see if the refinance makes sense. See how many months it will take you to recoup your closing costs and see if the juice is worth the squeeze.