How to Refinance a Mortgage to Pay Off Debt
- 1). Pull a copy of your credit report at Annual Credit Report, the federally-mandated website for US citizens. Also pay for a copy of your FICO score, a three-digit number between 300 and 850. This score tells lenders where you fall on the credit spectrum. Scores over 720 are excellent; scores below 600 are poor.
- 2). Add together all of the bills you would like to consolidate. You must make sure that you have enough equity in your home to cover your old debts. Access an appraisal estimate using an online valuation site (such as Zillow, see Resources). Subtract your current mortgage balance from the estimate appraisal. This your estimated equity.
- 3). Do a loan-to-value (LTV) calculation. Lenders use this ratio to determine how much debt is against the home they are securing. To calculate, simply divide your total mortgage balance by the value of your home. For example, if you have a $100,000 mortgage on a home worth $150,000, your LTV is 66 percent. However, if you wanted to refinance and include $25,000 in bills, your new LTV would be 83 percent.
- 4). Research lenders based on your FICO score and estimated LTV with all of your consolidated bills. Most lenders will not finance properties whose LTV exceeds 95 percent--especially in the wake of the sub-prime mortgage crisis in 2008. If you have a great FICO and LTV ratio, look only at local banks and credit unions. If you have less-than-perfect scores, you'll also need to research finance companies.
- 5). Narrow the field of prospective lenders to three or four. You do not want to submit too many applications as each one will generate a new credit inquiry. Collect all the documents needed: income statements, existing mortgage paperwork and copies of the old bills.
- 6). Apply for refinance consolidation loans with all of these lenders. Make sure to give your loan officer all of the documents listed in Step 5. This will expedite the pre-approval process. Remember that you are not committed to any offer until you give the go-ahead.
- 7). Compare all pre-approved loan offers. Pay close attention to the fees charged and the type of interest rate offered (fixed, adjustable, variable). Choose the one that best meets your financial needs and goals.
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