Curve

Why refinance now? Because your home equity, credit scores are higher than you think

Erik J. Martin
The Mortgage Reports contributor

In this article:

Refinancing your mortgage makes a lot of sense—if the math is in your favor. If you can reset your loan at a lower interest rate than what you’re currently paying, you may be able to:

  • Refinance now and save big
  • Take cash out at closing to cover a home improvement project, pay off debt, or fund a major purchase
  • Enjoy more financial flexibility

While mortgage rates have been trending higher, that doesn’t mean refinancing is off the table for everyone. You may want to lock in a 30-year rate if you currently have an ARM, eliminate mortgage insurance, or cash out some equity (mortgage financing is often the cheapest form of borrowing available).

Verify your new rate (Nov 18th, 2018)

What the research found

The average national FICO credit score recently hit a new all-time high: 704. That’s good news for borrowers, because higher scores qualify for better loan rates and terms. FICO reports that the average score hit bottom, at 686, about 10 years ago.

Related: Best uses for mortgage cash-out refinancing

FICO scores vary from 300 to 850. A score of 704 is considered “good”; scores between 740 and 799 are “very good”; and a score of 800 and above is regarded as “exceptional.”

What’s more, home equity is on the rise, too. CoreLogic reports that home equity increased in quarter 2 of 2018 by 12 percent ($981 billion).

Increased home equity and better credit scores could qualify you for a better loan than the one you currently have.

Why FICO scores are up

Keith Baker, Mortgage Banking Program coordinator and faculty at North Lake College, isn’t surprised by the rise in average credit scores.

“Rising wages, lower unemployment, and the passage of time have helped,” he says. “Delinquencies and collection efforts that occurred during the Great Recession have rolled off the credit records for many.”

Related: The effect of a 680 FICO score on your mortgage

Another factor has helped matters, too: The three major credit reporting agencies began excluding all tax liens from credit reports earlier this year. That’s a plus for borrowers.

“Excluding this information from a credit report makes it harder for lenders to assess the riskiness of a borrower,” says real estate attorney and Florida International University instructor Suzanne Hollander.

In addition, consumers have helped their own cause.

“People are more aware of the importance of credit and how to have healthy credit,” she adds.

How rising credit scores helps you

An increase in your FICO score means you’ll have an easier time refinance your home loan. Fannie Mae’s Loan Level Price Adjustment (LLPA) matrix shows that improving your credit by just a single point in some cases (say, from 679 to 680) can shave thousands off your refinancing costs. The table below shows the difference one point can make.

$350,000 Home, 20% Down  Rate Payment
679 Credit Score 5.5% $1,590
680 Credit Score 5.125% $1,525
Difference 0.375% $65/mo
5-Yr Savings $3,900

“Lending rules won’t necessarily loosen. But available credit will be more accessible,” says Baker.

“This is due to improvements in the overall credit condition of consumers along with huge increases in overall liquidity. Consider that the total of all checking, savings and certificates of deposit have risen from around $6 trillion in 2008 to over $10 trillion in 2018, per the FDIC.”

Your credit score

Your credit score is just one criterion that lenders consider when you apply for a loan. But it is one of the most important. That’s because your credit score assigns a numerical value that quickly tells lenders if you are a low or high risk for them.

Related: 5 ways to raise your credit score today

“Put yourself in the shoes of the bank,” Hollander notes. “The lender is giving you money to buy a property. You’ll have that money, the title to the property, and possession of the property. All the lender has is the promise you make to repay the loan and a lien on your home.

“So they have to do their due diligence to ensure that your promise is trustworthy. Your good credit score gives them peace of mind.”

Your home equity

The equity you’ve built up in your home can help you refinance also. Equity is the difference between what your home is worth and what you owe against it. It may be expressed as a dollar amount or as a loan-to-value, or LTV.

Related: How to get equity out of your home

LTV is the ratio of your total mortgage balance(s) divided by your home’s current value. If your home is valued at $300,000, and you owe $200,000 on your mortgage, that’s an LTV of about 67 percent and home equity of $100,000. Your $200,000 mortgage divided by your $300,000 home value equals .67, or 67 percent.

Lenders often require an LTV of 80 percent or less for a refinance loan without mortgage insurance. So the more equity you’ve built up, the better your odds of scoring a refi loan with a better rate and terms.

Refinance now with these scores

Not everyone has the best credit scores, of course. So you’ll need at least a minimum score to refinance, depending on the program and refinance type:

  • 500 and up for an FHA loan refi
  • 620 and up for a conventional (non-government) refi
  • 640 and up for a cash-out refi

Understand that mortgage lenders are free to (and often do) impose stricter guidelines than required by these programs.

Fast ways to raise your score

To up your credit score, try these steps:

  • Check your credit report. Request a free copy at AnnualCreditReport.com. Look carefully for any errors
  • Alert the three credit bureaus about any errors you find. “A 2015 Federal Trade Commission report showed that 79 percent of those who file credit report disputes experience a modification,” says Baker
  • Reduce your debt. Pay off credit card balances, auto and student loans and other forms of debt
  • Improve your debt-to-income (DTI) ratio. Learn your DTI by summing your expenses and dividing it by your gross monthly income. Lenders prefer a DTI of 43 percent or less
  • Don’t apply for too many forms of new credit in too short a time. Your credit score is impacted by the amount of creditor inquiries made to your credit report
  • Avoid maxing out your credit cards. Charge only as much as you can afford to pay off in full on your next billing cycle
  • Make payments on time. Set up automatic payments through your lender or financial institution. And always punctually pay the minimum stated on your bill

If errors on your credit report are causing your score to be lower than it should, your lender can help with a rapid rescoring service. The cost is nominal, and your report and score can be corrected in as little as 48 hours.

Verify your new rate (Nov 18th, 2018)