Jan 9, 2009 10:56 pm US/Eastern
Credit Score Important When Refinancing Mortgage
PITTSBURGH, Pa. (CBS) ―
Though the Pittsburgh housing market has not experienced the major burst in the housing bubble unlike other parts of the country, Pittsburgh homeowners still struggle with mortgage refinancing.
Nationally, 20 percent of new refinance applications are rejected due to credit scores and reports. In Pittsburgh, however, less than 10 percent of applications are denied.
According to Bernie Selkovits, a loan office and partner for Federated, lenders are using new guidelines.
"Fanny Mae and Freddie Mac set a guideline that 740 or higher gets you best rate," Selkovits said. He added that a score of 680 still gets a good rate.
FHA loans accept credit scores as low as 620 for a five percent loan and one of his lenders accepts a credit score as low as 580.
Refinancing a home only makes sense if the difference in interest rates is at least two points, Selkovits said.
"If they go back to a 30-year fixed at a four and seven-eighths rate, they're going to have a dramatic savings in their payment—probably as much as $200 a month, depending on the loan size, he said."
Selkovits took a homeowner who borrowed $200,000 at six and a half percent for 30 years. The current mortgage payment is $1,263. If the homeowner refinances at four and seven-eighths percent over 30 years, the payment would drop to $1,058; over 20 years, the payment would be $1,305.
Selkovits warned that although a credit score of 740 to 680 will get a good rate, the interest rate will creep up as the lender considers not only the length and the amount of the loan, but also whether the applicant missed a mortgage payment in the last 12 months or paid late on a credit card.
The problem with all the denials goes beyond those with just questionable credit scores. It has to do with the credit industry as a whole and the fact it has been reduced to 1/3 of what it once was.
If a homeowner can lower their interest rate by two points and if the homeowner plans to keep the home for more than six years, Selkovits said it is probably a wise decision to refinance.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
Timeline: U.S. Credit Crunch & Financial Failures
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