My Credit Score is 610. Can I Refinance into a Fixed Rate Loan with My Score?

Q: I have an arm at 6.5% that adjusts in august. My credit score is 610. Can I refinance into a fixed rate loan with my score or should I consider another arm?
A: As of January 2010, fixed-rated mortgages dropped to about 5%, a very attractive rate for homeowners thinking about refinancing.

However, those very low rates are going to the banks’ very best customers: those with pristine credit (i.e. FICO scores above 740) and individuals with at least 20% equity in their homes.

For everyone else, expect to pay a higher rate. Since you said you do not plan to be in the house much longer (3 years at most), an ARM may not be a bad move.

According to BankRate.com, 5/1 Adjustable Rate Mortgages are currently averaging 4.36% nationwide, compared with a rate of 5.14% for 30-year fixed rate mortgages nationwide.

Calculate Your Break Even Point

Use the mortgage-refinance calculator on Bankrate’s site (http://www.BankRate.com) to run a couple of different scenarios. Also, talk to a mortgage broker or to your existing lender about what rates and terms you’d likely qualify for in the current market.

They will be able to tell you your “break even point.” That’s the number of months it would take you to recoup the cost associated with refinancing your home.

For example, if your refinance costs $9,000 to get done, but it saves you $200 a month (because you got, say, a 5.25% interest rate), then your break even point would be 45 months – or 3 years and 9 months.

As long as you live in the house that long, it will have been worth it for you to refinance. If you live in the house for a shorter period of time, then you basically lost money on the refi.

Consider FHA Alternatives

If you don’t like what you see in the breakeven analysis, and you simply want the security of a fixed rate loan – which is the better deal for most people right now – then think about getting a government insured mortgage.

Among conventional lenders, I suspect that your 610 credit score would put you in the bottom tier of customers, if you can get approved at all.

But that wouldn’t necessarily be the case with a government-backed FHA loan, which would certainly be a mortgage option to consider.

FHA loans are based on your debt-to-income ratio, and not your credit score. But a lot of lenders who do FHA loans are imposing their own credit score requirements for these loans, even though the government doesn’t. If you don’t meet their minimum credit score cutoff, lenders (and soon the government) will charge you a higher rate.

See the Housing and Urban Development’s website (http://www.hud.gov) for more information on FHA loans.

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