What you need to know to get the best rate

Refinancing today is not the same game it was a few years ago, when homeowners with even a modest amount of equity and just so-so credit could score a great loan.

You now need good credit, lots of equity and very little outside debt.

“These are very traditional lending standards, but they’re going to come as a shock to anybody who has only been in the market for the past 10 years,” said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, N.J., publisher of loan information.

Homeowners who don’t meet those standards might be able to take advantage of a relief program by the Obama administration that allows people with decent credit to refinance even if they have little or no home equity.

But that program is only for those who owe more than 80% of what their homes are worth -- and whose loans are small enough to be backed by the government’s guarantors, Fannie Mae and Freddie Mac.

How can everyone else get the best mortgage in today’s market?

Good credit score

Two years ago, you could get a good loan with a credit score of 680, said Jeff Lazerson, president of Mortgage Grader, an online brokerage. Today, you’d better have a score of 700 -- and if you want the best rates, a 740 and above.

The most widely used credit score is called the FICO, based on a model devised by Fair Isaac Corp., which assesses your risk to lenders on a scale of 300 to 850. The higher the score, the lower your loan rate.

Not sure of your credit score? Then it’s time to check, said Greg McBride, senior financial analyst for BankRate.com.

Fair Isaac is currently running a promotion for its Score Watch service that allows consumers to get their credit score for free at www.myFICO.com for 30 days. Beware: If you don’t cancel before the trial period ends, you will be billed at the annual subscription rate. That costs roughly $90.

If your score is too low to get the best loan rates, consider cleaning up your credit before applying, McBride said. The FICO website and credit scoring services provide how-to suggestions.

Financial ratios

Two other numbers are going to have a significant effect on how much you pay for a mortgage: your loan-to-value ratio and your debt-to-income ratio.

Loan-to-value ratio indicates what your house is worth versus the amount you’re borrowing. Generally, low rates are reserved for those borrowing less than 80% of their home’s value. Those borrowing less than 60% get the best rate, Lazerson said.

Debt-to-income ratio reflects your financial life and is used to estimate how much you can afford to borrow by comparing your monthly debt payments -- house, car, credit cards, student loans, etc. -- to your gross, or before-tax, income. In years gone by, lenders would allow you to borrow up to 55% of your income, Gumbinger said. Today, they’re going to want to see you borrowing 43% or less, he said.

Watch your loan balance: The lowest rates are reserved for “conforming” loans, which are for $417,000 or less. For those with good credit borrowing no more than that amount, 30-year fixed-rate mortgages cost 4.78% on average last week, according to Freddie Mac.

Need more? You’ll pay more. But the rate for an “extended conforming” loan of as much as $729,750 isn’t substantially higher -- it’s roughly 4.875% to 5%.

If you need a “jumbo” loan, rates are considerably higher, Lazerson said. People in high-cost counties such as Los Angeles and Orange who borrow more than $729,750 are likely to pay 6% to 8% -- even if their credit is perfect.

Guesstimate your time frame: If you’re going to be in your home for decades, it’s smart to lock in a 30-year fixed-rate mortgage at today’s historically low prices, experts agree. But if you’ve got a short time horizon, rates on adjustable loans can be highly attractive.

One loan, which is fixed for five years and then adjusts once annually thereafter, was priced at 3.99% last week, Lazerson said. And those who have existing adjustable loans that are re-pricing this year are likely to see their rates drop to about 3%, Gumbinger said.

If your time horizon is short, these adjustable loans are a deal, both experts say. If you only need a $400,000 loan for five years, for example, the 3.99% adjustable rate would save you $240 a month, or $14,364, over the 30-year fixed-rate option.

But if you plan to stay in the home for a while, you’ll need to watch rates closely to jump into a fixed mortgage before rates climb.

Shop rates and fees

It’s pretty easy to shop rates at websites HSH.com or BankRate.com, which list current mortgage rates offered by dozens of lenders. But make sure you also shop for fees. Each lender you consider should provide a “good-faith estimate” of the total fees, including the cost of appraisals, title insurance, processing and “points.”

Typically, these fees would amount to anywhere from $0 to $6,500 for a $400,000 loan. (In some cases, lenders offer no-cost/no-fee loans, but charge a higher interest rate for the privilege.)

To make apples-to-apples comparisons when you’re getting apples-to-oranges offers, use the monthly payment calculator at MortgageGrader.com, adding the fees (if any) to your loan balance.

For instance, Lender A offers a no-cost loan at 5.25%. Lender B offers a 5% rate, but will charge $6,000 in fees. Which is the better deal?

You’d plug in the loan balance of $400,000 at 5.25% at the Mortgage Grader site to find that your monthly payment would be $2,208.81 with Lender A’s offer.

To compare the offer from Lender B, you’d plug in a loan balance of $406,000 (the loan amount plus fees) at 5% to find that your monthly payment would be $2,179.50. Lender B’s deal would save you nearly $30 a month, or $10,500 over the 360-month life of the loan.

It’s also worth mentioning that some fees are negotiable. The most significant among those is for title insurance. How much of a difference can shopping for title insurance make? A recent good-faith estimate from Wells Fargo Bank quoted $930 for a title insurance policy for a $380,000 loan and estimated additional fees of $650. The borrower found EasyTitleQuote.com through a Google search and filled out a short form. The resulting bid: $357 for insurance, plus $500 for other fees.

The borrower saved $723.

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kathykristof24@gmail.com