How to Refinance Your Mortgage If You Have Good Credit

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We recently refinanced, taking advantage of the historically low rates precipitated by the financial crisis.  But given the tremors felt throughout the banking industry, even homeowners with the best credit may have a hard time closing the deal.  Here are some thoughts on what worked to get us a good deal:

  • If you want to get a bargain, consult several lenders, and don’t limit yourself to dealing with just one until you’ve locked in to an interest rate.  A good source to look for lenders is Bankrate.com.
  • Get your credit scores from a service that provides scores using algorithms actually used by lenders.  I learned that credit score providers offer scores at three levels of quality, 1) the actual score that will used by lenders, 2) a score that may vary by a few points from what lenders see but is still close enough to be useful, and 3) a score using a system completely different than what lenders use.  The first two are worth purchasing to prepare to negotiate your mortgage; avoid the third.
  • Figure out where lending guidelines make you eligible for certain types of loans.  740 is often considered high enough to qualify people for the best offers, but people with significantly higher scores may be able to squeeze even more value out of a deal, like asking the lender to waive escrowing property taxes and home insurance without raising the interest rate.
  • If you would like to raise your score, which may qualify you for better interest rates, consider paying off credit cards.  If you pay your cards off every month but put a lot of your regular expenses on them, try paying the whole balance off before the close of the current billing period.  Since credit card companies often report your balance as the amount due at the end of each billing cycle, if you pay in full before the end of the cycle (as opposed to waiting for them to send the bill and paying it on time) your reported balance will be zero.
  • Some sites like myFICO.com offer tools to predict how much paying off balances will change your score.
  • Also on the subject of credit scores, beware that there are three credit reporting services, Equifax, Transunion, and Experian.  This is a separate matter from the quality of the service used to obtain the score—scores from all three agencies are potentially relevant to your loan application as lenders will often use the middle score to determine the rate you qualify for.

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