USA Today - What credit score do I need to refinance?

Gary Alt, co-founder and wealth manager of Monterey Private Wealth in Pleasanton CA, was quoted in the USA Today article, "What credit score do I need to refinance?" on October 27, 2014.

What credit score do I need to refinance?

by Claire Davidson, NerdWallet

As mortgage rates hit 16-month low s, everyone is trying to refinance – even former Federal Reserve Chairman Ben Bernanke . Those whose credit scores were less-than-stellar when mortgage rates were at their lowest a few years ago might be wondering whether it's too late to get a better deal.

The answer: It depends.

"If your credit score has improved a lot and you own a home, I definitely think it would be good to just look at the numbers," says Johanna Fox Turner, NerdWallet advisor and certified financial planner at Milestones Financial Planning.

Before refinancing your mortgage – that is, asking another bank to buy your mortgage and provide you with new terms for paying it off – it's important to think about whether it's worth the cost. Here's what to do:

Double-check your credit

Chances are, lenders won't see your credit score the same way you do. Usually, mortgage brokers take the middle of the three major credit bureau scores into consideration when assigning you an interest rate. Additionally, if your spouse has worse credit than yours, his or her might be weighted more heavily. Prepare by getting free credit reports from all three major credit bureaus before you start refinancing.

Compare deals

If you got your mortgage in 2012, when rates were very low, you might have been able to lock in a good deal even if your credit wasn't the best.

The monthly average interest rate for a Freddie Mac 30-year fixed rate mortgage was 4.16% last month, compared with 3.5% in September 2012. Since interest rates for those with good credit and bad credit generally vary by less than 1%, that means that even barely prime borrowers who took out a mortgage in 2012 are still likely paying less in interest than borrowers with superior credit taking out similar loans in 2014. If you managed to get an interest rate below 4% on a 30-year fixed rate mortgage, even without great credit, you'd likely lose money by refinancing with another 30-year fixed rate mortgage now.

However, if you're financially able to shorten your mortgage, it could be another story. For example, if you're going from a 30-year fixed rate mortgage to a 15-year fixed rate mortgage with around a 3% annual percentage rate, you could save more in the long run.

When refinancing, it's always a good idea to make sure you aren't spending more money than you're saving on closing and other fees, notes Gary Alt, a NerdWallet advisor and certified financial planner at Monterey Private Wealth.

"Sometimes people get a little too focused on one particular goal without really looking at the big picture," he says.

To start the process, talk to your real estate agent and current mortgage company about your property's value and your options. If you decide refinancing is still the right choice, start looking for the best rates and putting in applications.

Consider your options

Cash-out refinancing, or taking out a new mortgage worth more than you owe and pocketing the difference, is another option available to those with improved credit. This can provide you with extra money to cover anything from credit card debt to a child's first year of college, but borrowing against your house comes at a cost.

"You could put your home at risk," says Turner. "And you have to realize your home's probably your most valuable asset."

If you're not interested in doing cash-out refinancing but are simply trying to lower your payments by switching from a 15-year fixed rate mortgage to a 30-year fixed rate mortgage, it's also important to note that you may end up paying thousands more in interest in the long run.

If you need to free up some cash, Alt suggests considering some other options.

"With certain life changes coming up… [consumers] might consider an adjustable-rate mortgage, then refinance into a fixed-rate mortgage in two years," says Alt, noting that this option could provide the borrower with more flexibility.

Get started

As long as you don't drag out the shopping process for too long, taking the time to find the best refinancing deal could save you a lot of money. If all your applications are requesting the same type of mortgage within a 14-day period, all the banks' requests for your credit information should show up as either one or zero inquiries on your credit report, according to the Consumer Financial Protection Bureau.

While shopping for rates, if you find out that refinancing would actually cost you more than keeping the mortgage you already have, don't be afraid to change your mind. Ultimately, improving your credit is cause for celebration, but it doesn't mean you should rush into a deal without thinking it through, notes Turner.

"I don't think you should jump into it lightly," she says.

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