Should I refinance now or wait for higher scores?

Scenario:

I’m looking to refinance from 8.5% 30 year fixed rate mortgage to lower 30 year fixed loan. I owe $70,000 on $150,000. My credit scores are 725, 680, and 695. I’m also looking for additional cash of around $5000 to pay off the balance of $3000 on a second mortgage. I don’t have any other loan or credit cards. Can I expect to get a good rate of interest for the refinance loan or should I wait for even higher scores for a lower rate of interest? I’d be making extra payments too.

Solution:

I must say that you have good credit scores in all. With a middle score of 680, you are likely to qualify for a refinance loan at favorable rate of interest. What I appreciate is that you don’t have credit card debts piled up. So, you can at least spend a part of your paycheck in repaying the refinance mortgage. It’ll also help you pay extra towards the principal. Making extra payments does help you get rid of debt faster.

Now as far as current mortgage rates are concerned, 30 year fixed mortgage rates have dropped down to 6.04% from 6.14% as on November 22, 2008. Since rates are on a slowdown, and are expected to go down further, therefore, you can try out for a 30 year refinance. Also, you need additional cash. Therefore, you can look out for lenders offering refinance with a cash-out option. But you’ll get a slightly higher rate if you go for cash-out refinance and not a simple rate and term refinance. However, there are lenders who may ask for penalty if you’re taking out a mortgage worth less than $80K.

Now, if the lender finds out that you’re interested in making extra payments, chances are that he may not offer a loan without prepayment penalty.  This is because he’ll lose the interest you could otherwise pay during the time period between the end of the loan term and the date when you prepay the loan. As far as prepayment penalty is concerned, some lenders may charge 6 months of interest as the penalty. You can check out the loan doc for any information on prepayment penalty.

Finally, I don’t think you need to wait for higher scores. This is because you may get the same rate of interest for any credit score between 720 and 800. What’s important is to get the details of the loan offer and compare apples to apples prior to choosing the best.