How Do You Know if You Should Refinance?

By Gabriel Traverso
Mortgage Credit Problems Columnist

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There are a number of reasons why you might be considering a mortgage refinance, especially if you have bad credit. However, some reasons suggest taking action sooner rather than later.

Bad Credit: a Good Time to Refinance

For the past few years, low rates and creative lending practices have enabled buyers to get into the homes they aspired to, though sometimes more home than they could afford. Now the market is changing and some lenders are tightening their guidelines--if you can squeak in before underwriting gets even tougher, a mortgage refinance might be the right move for you.

Bad Credit Could Get Worse

If you have an adjustable rate mortgage or any other type of loan where the payment terms change over time, you need to ask yourself if a jump in monthly payments could make your situation worse. After all, if your rate suddenly went up a few points you could be seeing a monthly payment several hundred dollars higher. If you can't afford these higher payments you could be facing a situation where late and missed payments could make your bad credit even worse.

Finding a Benchmark

How do you know if you'll be in trouble when your rates go up? A commonly used benchmark is this: Does your yearly mortgage, property taxes, and homeowners insurance add up to more than 30% of your gross annual income? Will they exceed 35-40% when your mortgage resets? This could be an excellent indicator that now is the right time for you to consider a mortgage refinance.

Refinance Your Mortgage

The best solution for most is a rate that is fixed for a few years while you improve your credit--and the mortgage should amortize over 15 or 30 years--consider a 40 year term only if you need the slightly lower payment to qualify. Rates will vary based on your credit, but you'll find peace of mind knowing that there aren't any surprises around the corner. Contact several lenders to investigate your options. Even if you have bad credit, you should find that you have choices. Check with at least three lenders and compare the costs, then decide if a mortgage refinance right now would be right for you.

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