Even homeowners with poor credit scores may be able to take advantage of mortgage refinancing options to ease their financial burden amid the coronavirus pandemic.
The housing market is one of the only parts of the economy that's seen a solid rebound during the Covid-19 crisis, thanks in part to market volatility driving mortgage rates down. The average rate on a 30-year fixed mortgage is now 2.81%, Freddie Mac said Thursday. It's the tenth time this year the rate has hit a record low.
That's also sparked a refinancing frenzy from existing homeowners looking to capitalize on the new low-rate environment and secure a lower monthly payment or different loan terms. Currently, there are nearly 19 million refinance candidates in the market with average potential savings of $297 per month, according to Black Knight, a mortgage technology and research firm.
One of the barriers to refinancing a mortgage, however, is a credit score. Because refinancing a mortgage is paying off your existing loan with a new one, lenders want borrowers in solid financial standing – many require a minimum credit score of 620.
But not all borrowers have good credit. More than 30% of consumers have a FICO credit score between 300 and 669, between "poor" and "fair" ratings, according to Experian.
"Regardless of credit, it's still worthwhile looking into refinancing as an exercise to save money over time," said Lauren Anastasio, a certified financial planner at SoFi, a San Francisco-based online personal finance company.
1. Shop different lenders
It makes sense for many borrowers to start looking for refinancing options with their former lender, said Anastasio. Because that lender has already given you a mortgage, it may be more likely to help you refinance, she said.
But it's also worth it for borrowers to shop around, according to Anastasio. There may be another lender that is willing to give them a better rate, even with less-than-perfect credit.
2. Explore FHA loans
Borrowers should also explore Federal Housing Authority loans, which have refinancing options with credit benchmarks that can be below 600. These loans are insured by the federal government and available through many lenders.
Those with an FHA loan can take advantage of the program's Streamline Refinance program, a faster and less expensive way for existing borrowers to lock in lower rates. While you can't take advantage of this program if you don't already have an FHA loan, you could still do an FHA refinance.
3. Do a cash-out refinance or remove private mortgage insurance
A cash-out refinance is "a huge tool to help customers really get to a place where they have extra cash and they can use that to pay off debt," said Lucy Randall, director of sales at online lender Better.com. She added that usually borrowers that own a good chuck of equity in their home benefit the most.
What this kind of refinance does is allow you to accept a loan with a higher principal balance than what you owe on the mortgage and take the rest out in cash. That can then be used to consolidate and pay off debt, do home repairs or go towards other financial goals, said Randall.
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In addition, borrowers who previously had private mortgage insurance, or PMI, which protects the lender, can refinance to remove that insurance if they've built up more than 20% equity in their home. Removing PMI can lower monthly payments.
4. Go for VA options if you're eligible
Veterans have access to "what's arguably the most powerful home financing option on the market," through the Department of Veterans Affairs loan benefit, said Chris Birk, vice president of mortgage insight, 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 through many lenders.
Those with an existing VA loan can take advantage of the interest rate reduction refinance loan, or IRRRL, and may be able to lower their monthly payments without worrying about their credit score, said Birk.
If you have a non-VA mortgage, you could do a cash-out refinance through the VA. Veterans loans can be a great option because they have built-in guidelines around recoupment and lower rates put in place to protect borrowers, Birk said.
If you're thinking about refinancing
To be sure, these options may still not be worth it for some borrowers, including those that may not stay in their current home for than a few years.
To assess if a certain refinance rate will work for you, it's important to include closing costs against your potential monthly savings, said Anastasio, as it can cost thousands of dollars to go through the process.
It's "important to know that you're going to stay in the home long enough to recoup costs," she said. Ask for a break-even analysis, which will show how long it will take to recoup your costs.
If you can't find a refinancing rate that makes sense, it is likely a sign that you already have a good deal, according to Anastasio.
"Refinancing right now can make sense for the right person but someone does not need to feel like they should be refinancing out of fear of missing out," Anastasio said.
To make sure you're getting the right refinance for you, find a lender that you trust that will take the time to walk you through your options and explain them to you, Randall said.
If as a client is "working with somebody who's reputable and they feel good about the transaction and they're getting into a better financial position, that's really all that matters," Birk said.
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