Time To Refinance?

As the federal reserve cuts interest rates, refinancing your mortgage might be less expensive. However, you may find it harder to refinance now, as lenders crack down. The key, more than ever, is to boost your credit score.

When Jay and Quiana Williams bought their Chicago home in the spring of 2006, some credit issues made mortgage shopping difficult. Quiana’s credit was just OK. “When we applied for a mortgage, we only used Jay’s credit score,” says Quiana, 33, a software engineer. Jay’s score was considered good (mid 600s) and Quiana’s was fair (low 600s). Jay was allowed to qualify for the loan by himself, but combine Quiana’s income when applying. This arrangement was one reason they would end up paying higher interest rates.

A mortgage broker put together a package of two loans for the $536,000 they needed to borrow. Rates were steep, though; a 15-year balloon mortgage (relatively reasonable monthly payments but a large amount due at maturity) for $84,000 had a rate of 12.25%, and a seven-year adjustable rate mortgage for $452,000 had a 7.2% rate.

Fast-forward 16 months to July 2007. “Jay and Quiana are poster children for doing everything right to bring down their mortgage costs,” says Chris Long, a Chicago-based financial planner who advises the couple. “They made sure they paid all their bills on time and they checked their credit scores regularly.”

Quiana’s credit score had improved so much that the couple could use both scores to refinance their high-rate loans last year. By then, when old late payments rolled off their credit reports, Quiana’s score had increased by about 50 points and Jay’s by about 20. Generally, late payments are reported for seven years. Jay says that their continued track record of on-time payments raised their scores even further by early 2008: Jay was at 795 and Quiana at 705.

“Our mortgage broker got us a 30-year fixed-rate loan at a little more than 7% and a 15-year balloon, at under 9%,” says Jay, 33, the CFO of a food service distribution company. “We reduced our mortgage payments by about $550 a month.”

Know the score. The Williams’ experience can serve as a lesson for any homeowners carrying high-rate mortgages. “Today, superior credit scores are vital for anyone who wants to refinance,” says financial planner Long. “To get the best rates, you would need a score of 720-plus for most lenders. You might be able to refinance if your credit score is between 620 and 680, but you might pay a high interest rate.” Scores range from 300 to 850.

Long suggests that anyone thinking about refinancing find out their credit score before making an application. “You can get a score for a modest price, $15.95, at myFICO.com,” Long says. “For a married couple, both spouses should get their scores. Once you know your credit score, you’ll have a better idea of the terms you can expect from a lender.”

Equity expectation. Having a good credit score may only be the beginning, now that lenders are taking a hard