Low credit score makes refinancing difficult
As is usually the case, I often run out of time before I can answer all the questions submitted during my regular online discussions at www.washingtonpost.com. So here are a few I wanted to get to:
Q: The value of my property has about doubled. I owe $140,000 on my home. Folks are selling similar homes for more than $280,000. My credit rating is in the 500 range. Do I have any hope of being able to refinance? What type of institution would be best to contact for a refinance?
A: As the Rev. Jesse Jackson always says: “Keep hope alive.” Even with a low credit score you can get a home loan these days. Many traditional and online lenders have loan programs for consumers with poor credit histories. However, with a score in the 500 range you fall into the subprime lending category. That means your refinance rate won’t be all that attractive. For example, let’s say you refinanced for a $200,000 loan. With a super great credit score of 720 or above you might qualify for a 30-year fixed rate of 5.636 percent, making your monthly payment (excluding taxes) about $1,150 a month. But with a credit score of 500 to 559, the rate increases significantly to 9.289 percent or a monthly payment of more than $1,650. (The rates I quoted come from national mortgage averages obtained by www.myfico.com as of July 18).
“You have lenders that will go as low as 476 but it’s going to cost you,” said Deenice Galloway, a mortgage loan specialist based in Bowie, Md.
But if your credit score is low because you have been late on your current mortgage payments, there may not be much hope for you to refinance, Galloway said.
“A lot of people don’t realize that you can’t be late on your mortgage and refinance,” she said. “You do not want to be late on your mortgage in the last 12 months.”
Each lender sets their own range of what constitutes a good credit score worthy of their best rates. Typically, if you have a credit score in the 650 to 675 range you’re eligible for good rates, Galloway said. Scores of 620 to 649 are OK but may push you into subprime territory, depending on the lender.
If you want to see how your credit score affects what mortgage rate you get, go to the credit education section of the www.myfico.com site and then click on the link for calculators. You want the “FICO score loan savings calculator.”
Q: I have had a bad financial year (worked for a startup that crashed and burned). I’m young and about to start a new job for which I need to commute. My current car is on its very last legs. What is the best way to proceed financially? Should I lease, buy new or buy used?
A: First, don’t you even think about leasing. Some people say this about leasing: “It makes sense because you don’t want to buy a car, which is a depreciating asset.”
Oh yeah, then why not just rent everything you have to use – furniture, clothes, washer and dryer? In the short term, a car lease may save you money every month. But buying a car and holding on to it for a while will save you more long term.
If money is tight, buy a used car. People are getting great deals on reliable used cars with low mileage thanks in part to the knuckleheads who have to turn in their leased vehicles. As one financial planner told me, leasing a car for business purposes is OK, but never for personal use.
Q: I’m hoping you can help me understand reverse mortgages. My mom is in her early 60s and has virtually no income because of a sluggish job market in the area where she lives. Her area also has an extremely expensive and quirky real estate market (Boston) such that it doesn’t make sense for her to sell the house. She lives in a modest house in a fancy neighborhood, so basically she’s house poor. What would be the pros and cons of a reverse mortgage for someone like her?
A: Reverse mortgages are available only to homeowners 62 or older. This type of loan allows seniors to convert equity in their home into tax-free cash, without selling, giving up title or having to make a mortgage payment.
A reverse mortgage doesn’t have to be repaid until the homeowner moves, sells or dies. Borrowers can take the loan as a line of credit, a lump-sum payment, fixed monthly payments or a combination.
The downside of this loan product is the high fees. To get an estimate of the fees you may be charged, try the reverse mortgage calculator at the National Reverse Mortgage Lenders Association’s Web site, which is www.reversemortgage.org.
Before you contact a lender about a reverse mortgage, visit AARP’s Web site on the topic at www.aarp.org/revmort. On the site you can download for free AARP’s booklet “Home Made Money: A Consumer’s Guide to Reverse Mortgages.” To order a free copy of the guide by telephone, call (800) 209-8085.