Mortage interest rates are lowest ever, shore up your credit to take advantage

NEW YORK — Many homeowners are finding now is a great time to refinance their mortgages. Lower interest rates and legislation aimed at helping owners whose mortgages are underwater have encouraged homeowners to take advantage of these opportunities, which might not come along again.

But before refinancing a mortgage, it’s wise for homeowners to examine their credit ratings and take the steps necessary to ensure they get the best rates possible when refinancing.

Get your credit report

Many people know they can access their credit report once a year for free. However, what those same people might not know is that there are three agencies that keep track of your credit, and you can access reports from each one for free once a year. So that’s essentially three free reports per year.

Homeowners who want to refinance their mortgages should stagger the reports so they don’t receive all three at the same time. This allows you to show how much progress you’re making on improving your credit over the course of a year.

Spreading out your credit reports also makes it easier to address any errors that may appear. For example, if your first credit report shows an outstanding balance on a given account, then you pay off that balance, that payoff should be reflected on your second report if you allow ample time between the payoff and when you place the order for your second report.

If the second report does not reflect up-to-date activity, consult the credit reporting agency and have the issue corrected.

Stop paying bills late

If you routinely pay your bills late, especially credit card bills, then you almost certainly won’t get the lowest interest rate when refinancing your mortgage. Make all credit card, utilities and installment loan payments on time.

Once you’ve established a lengthy pattern of paying bills on time, then that might be a good time to visit your bank and discuss refinancing your mortgage.

Don’t open new accounts

If you have a bad credit history, don’t open any new accounts, especially if you still have outstanding balances on existing accounts. Pay existing accounts down completely before you even consider opening a new account.

Once balances are paid in full, then you might shop around for a new credit card.

Many people with high outstanding balances have high annual percentage rates, so once you have paid down balances on those cards, you’ll be in a better position to apply for a card with a lower APR.

Don’t forget fees

Once you have addressed your credit score, there are some things you should know about the refinancing process.

First and foremost, don’t expect the process to be free. The Federal Reserve notes that it’s not unusual for homeowners to pay anywhere from 3 percent to 6 percent of their outstanding principal in refinancing fees.

Fees vary depending on where an applicant lives, but you should expect to pay an application fee, a loan origination fee and points.

Points are a percentage of your mortgage loan, and there are two kinds you might have to pay. Loan-discount points are a one-time fee that you’re paying to reduce your existing loan’s interest rate. Some lenders also charge points to earn money on the loan. You likely paid points on your initial loan, but points when refinancing aren’t necessarily fully deductible like they were the first time around.

Additional fees can include an appraisal fee, inspection fee, closing fee, and other fees that, when added up, can cost homeowners a substantial amount of money.

Nothing’s ‘free’

Another thing homeowners should study before deciding to refinance is no-cost refinancing. No-cost refinancing is a bit of a misnomer, as you might not pay closing costs if yours is a no-cost refinancing, but you will avoid those costs at the expense of a higher interest rate on the remainder of the new loan.

Since many homeowners refinance their mortgage specifically to lower their interest rates, no-cost refinancing might not be in their best interests.

In some instances, no-cost refinancing may simply include the aforementioned fees in the new loan. This means the fees are added to your loan’s principal. You will be repaying them with interest over the life of the loan. In such instances, many homeowners simply prefer to pay the refinancing fees upfront, but that’s a decision for each individual to make.