Should You Refinance?

DO THE MATH—A real estate & all things related column
By Terry Akiyama
Terry Akiyama
Terry Akiyama
May 16, 2013 Updated: May 16, 2013

This week’s:

Should You Refinance Your Mortgage: Quick Study Sheet (Updated)

Conforming Loans (up to $417,000 loan amount): If your rate is over 3.75 percent, you should consider refinancing.

High Balance Loans (up to $625,500 loan amount): If your mortgage interest rate is above 3.875 percent, you should consider refinancing.

True Jumbo Loans (over $625,500): If you currently have an Adjustable Rate Mortgage (ARM), it’s a good time to refinance it to a fixed rate. If your rate is above 4.25 percent, you should consider refinancing to a lower available rate.

Do The Math.

Knowledge is power. Let’s empower everyone with regards to credit, as in “Credit Reports,” “Credit Scores,” and “Managing Your Credit.”

Take advantage of AnnualCreditReport.com to get free credit reports from the three primary credit bureaus—Equifax, Experian, and TransUnion. The U.S. government has mandated under the federal Fair and Accurate Credit Transactions Act (FACT Act) that all consumers are entitled to look at their credit reports once a year, at no cost.

While a number of other vendors try to convince you that their credit report service is also free, you will find in the fine print that this is not the case, or that the “free” credit scores you are given are not your actual credit scores. I have had clients tell me what they think are their credit scores only to find out that they were given scores that were ideals to achieve, not actual credit scores that lenders would accept.

If you want to check your credit report, understand how to dispute inaccurate information, and understand how your credit is reported, accept no substitutes—AnnualCreditReport.com will provide you with access to all three credit bureaus and explain the credit reports and how to correct errors, at no charge to you. On the other hand, “credit repair” companies will charge you for doing what you could do on your own.

Since you have access to the three primary credit bureaus, you might want to look at them one at a time on a staggered basis, perhaps every four months, so you can monitor your credit throughout the year.

You can also monitor your credit score at no cost, once a month, using Credit.com’s “Credit Report Card.”

Your credit score is a heavily weighed factor in any mortgage loan, purchase, or refinance and can affect both eligibility and pricing.

Your score could also be reflecting an incorrect entry on your credit report, so you’ll want to take a look at and monitor both your actual credit report and your credit scores. Wells Fargo Bank periodically offers free credit scores disclosure to customers with accounts, so that could be another way to get your credit report and credit scores at no cost.

If you are applying for a mortgage, note that while these free reports are very useful and are the components of a Tri-Merged Mortgage Credit Report (a compendium of all three credit bureaus’ reports) they often differ from the report your lender will be using. Have your mortgage professional pull their Tri-Merged report and your FICO (credit) scores and help you to audit the report for accuracy. Keep in mind any discrepancies you discovered when you obtained and reviewed your free credit report(s).

Paying bills on time prevents delinquent payment “dings” on your credit report, but also note that being close to or over the limit on credit card accounts can also ding your score. Take note of how the amounts of your credit limits and current balances are reported. If they are inaccurately reported, let your mortgage professional know this.

Likewise, with the dates of past due payments, collections, foreclosures, short sales, tax liens, bankruptcies, and so forth—be sure they are accurately reported. Delinquencies should disappear from your credit report in 7 years, bankruptcies in 10. There is a specific period after short sales, foreclosures, and bankruptcies in which lenders will consider lending again, so these dates are critical. Make sure the information is all accurate before someone “does the math.”

Some Quick Q&As on Credit Reporting and Credit Scores:

Q: Should I pay off and close my credit card accounts to increase my credit scores?
A: Paying off credit cards is a good thing for raising your credit scores. Paying down credit cards and other credit obligations can also help raise your scores. However, you don’t want to close the credit accounts. Since one of the credit score components is the proportion of credit usage to credit lines, if you close credit lines, it will increase the proportion of credit usage and likely have an adverse effect on your credit score.

Q: I will not be applying for a mortgage refinance or other major purchases on credit for the next 6 to 12 months at least. Will it hurt my credit score if I open new accounts in the meantime?
A: Although opening new accounts can temporarily lower your credit score, if the new accounts come with highly advantageous features, for example, high credit lines or low interest rates, it may be worth taking the slight hit to the credit score. It’s best not to apply for credit excessively, as each application will likely generate an inquiry on your credit report. Excessive inquiries will adversely affect your credit score. If you subsequently apply for a mortgage, for example, the lender will require you to explain what you applied for and whether any new credit was extended.

Q: Who besides me can look at my credit report?
A: The list of organizations that can view your credit report includes: creditors, employers and potential employers, insurance companies, governmental agencies, and legitimate business contacts, such as a landlord.

Credit scores are a predictor of how likely you are to make your payments on time over the next two years. Late payments, regardless of amount, made in the last one to three months can have a huge effect on your credit scores.

So if you made a late payment last month, let’s say $25 on your Macy’s account, the effect on your credit score can be quite disastrous. “But I was only three days late, and it was only $25.” I have had clients declined for loans strictly due to their credit score, which was deflated by small late payments.

If you do receive a notice for a late payment in the mail, and you have previously made all of your payments on time, and “the dog ate the billing statement before I could pay it,” or whatever reasonable explanation you have for the late payment, try calling the customer service 800 number and ask to speak to a customer service representative. Tell them your sob story; tell them you’ve been a great customer in the past, that you hope to continue your patronage in the future, and that your credit is very important to you. Could they please waive your late fee and not report the past-due to the credit bureau?

Since we are touching on delinquent payments, let me also recommend that any time you anticipate difficulty in paying your bills, talk to the lender or creditor. They will likely work with you, devise a manageable payment plan for you, and avoid late fees and dinging your credit. I would also suggest contacting a nonprofit credit counseling agency, such as an affiliate of National Foundation for Credit Counseling (www.nfcc.org), and they can tell you if you qualify for a plan to better manage your debt, which they in turn can present to your creditors. Preserve your credit, reduce your stress, and make a donation to your favorite nonprofit.

Since the sites I am suggesting will fairly authoritatively discuss the particulars of your credit report and credit scores, I wanted to keep this brief and to the point. If you have questions or concerns about anything here or in general, please email me directly at takiyama@gmccloan.com or dmwmrt@yahoo.com.

© Terry Akiyama 2013 All rights reserved.
Terry Akiyama is District Manager and Senior Loan Officer at General Mortgage Capital Corporation, 1350 Bayshore Hwy. Suite 740, Burlingame, CA 94010, and can be reached at (650) 389-6124 or at: takiyama@gmccloan.com DRE 01165275, NMLS 289770.

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