Before Mortgage Refinancing, Improve Your Credit Score
Here’s a question for Bankrate’s financl advisor, Don Taylor. It centers on mortgage refinancing …
Q: I purchased a home a year ago. I did an 80/20 financing. The mortgage I chose was a 2/28 ARM. The housing market was doing quite well at the time. Since that time I am afraid the value of my home has dropped.
My questions are: Can I subordinate my first and refinance it when it is time for the loan to adjust or am I stuck? Is this possible without touching the second mortgage?
A: You can’t subordinate your existing first mortgage to another mortgage. The ability to refinance your current first mortgage while keeping the second in place depends on the terms of the existing second mortgage, but it is likely you can do that if the second is in no worse a credit position than the mortgages are under the existing first mortgage.
Review the loan documents and/or talk to the mortgage lender about it.
A subordinate loan is a mortgage whose priority is below that of another mortgage; i.e., a second or third mortgage or a home equity loan. In foreclosure, the first mortgage lender’s security interest in the property gets paid off before the second mortgage holder receives any payments.
A 2/28 ARM is typically used in mortgage financings when the homeowner doesn’t have a great credit rating. The idea is to build up the homeowner’s credit history; by doing that to his credit score, so he can mortgage refinance after the initial two years are up. There is normally a prepayment penalty associated with a 2/28 ARM, making it very expensive to refinance in the first two years of the loan.
Because you’re only one year in on your 2/28 ARM, you’ve got some time to evaluate your options. Make sure you understand the pricing index and spread on your current first home mortgage so you have an idea how to compute the new interest rate on the reset date.
Monitor your credit report and credit score to see if your credit is improving and make sure you stay current on all of your loans. Find out if you can keep the second mortgage in place while refinancing the first mortgage.
SOURCE: Bankrate.com