Refinancing may be the a great financial move to make if it reduces your current interest rate, enables you to cash out some equity in your home, or offers a more stable payment schedule with a fixed loan. Refinancing can be a tricky decision as the benefits often come with unexpected fees and costly hassle.

If you are considering refinancing your home, evaluate whether you stand to reap benefits or if you’re better off sticking with your current mortgage by asking these 3 simple questions:

1. What does your credit score and debt-to-income ratio look like? – Your credit score and debt-to-income are critical factors in refinancing. Your credit history shows lenders what kind of borrower you are and your income suggests your propensity to make payments. Credit score also helps to determine what interest rate lenders will offer; if your credit score is too low to earn you a worthwhile offer, actively manage your credit score before pursuing refinancing. For debt-to-income ratio, lenders typically look for a ratio lower than 38% (guidelines can vary). Improve your ratio by including additional sources of cash flow—like rent, annual bonuses, etc.—when documenting income, and develop a plan to reduce your overall debt.
2. How much equity do you have? – With the current home market, lenders will likely require at least 20% home equity, which is measured as a component of the loan-to-value (LTV ratio) of the home. That means that not having enough equity in your current home rules out the option of refinancing all together.
3. What are you trying to accomplish? –The current trends of record-low mortgage rates make refinancing an appealing prospect, but take into account all possibilities of the transaction. Do you want to shorten your loan term from a 30-year fixed to a 15-year fixed? Do you plan to sell your home in the next few years? If so, it may make more sense to keep your current mortgage plan. Do you have an adjustable rate mortgage, and want to make payments more affordable by switching to a fixed rate loan? Know your finance goals and prioritize them as you explore your options.

The most important factor to consider when refinancing is how much you stand to save. Do the extra math to calculate how long till you break even, how much your total loan cost will be at the end of the term, how much you save by lowering monthly payments, and if you can realistically afford to refinance. Lenders typically advise to refinance if homeowners can get a rate at least two percentage points lower than their existing mortgage. While the current market’s low mortgage rates are enticing, make sure refinancing will give you tangible, worthwhile savings to make up for its hassles and expenses.

From big cities’ high cost of living to the Midwest’s more affordable financial climate, where you live impacts your finances. If you are (or hope to be) a New Yorker, San Franciscan, or Washingtonian, home prices and general cost of living puts these areas at the top of America’s costliest cities. If you are looking for more bang-for-the-buck cities with solid housing market, stable employment, and reasonable property taxes, Omaha-Council Bluffs, Iowa and Little Rock, Arkansas made the top two spots for affordable living.

For more housing market updates, as well as Credit Karma news, check out the following roundup:

Credit Karma in the News

• Kiplinger mentions Credit Karma in FAQs on the new credit card rules, discussing how to qualify for a credit card with bad credit.
• How to get a free credit score, at Bankrate.com, features Credit Karma.
• Credit Karma makes the list on The Examiner’s Bay Area Cool Companies of 2009.
• ABC News names Credit Karma as a tool for strengthening your finances in 2010.
• More fees, less rate hikes? 5 changes 2010 could bring for credit cardholders, from MyBankTracker, quotes a few predictions from Credit Karma’s CEO Ken Lin: “As we look to 2010, creditors will be competing for the best customers as the economy improves.”

Home & Mortagage News

• The Wall Street Journal reports on how to find a moneymaker in the housing catastrophe.
• Thinking about refinancing? Bankrate.com offers two great articles of refinance tips in credit do’s & dont’s before a refinance and 3 steps to refinance your mortgage.
• Be wary of Uncle Sam’s mortgage modification program because it may affect your credit score, reports The New York Times.
• Read The Simple Dollar blog’s personal house-hunting story on home buying as an emotional purchase.

This Week’s Mortgage Rates

According to Bankrate.com, mortgage interest rates fell for the second straight week. The housing market is picking up more movement as mortgage applications rose a seasonally adjusted 14.3% when compared to a week earlier , applications for new home purchases edged up 0.8%, and refinancing activity surged 21.8% in the first week of January.

Bankrate’s recent survey results:

• 30-year fixed: 5.18% — down from 5.27% last week
• 15-year fixed: 4.69% — down from 4.76% last week
• 5/1 ARM: 4.47% — up from 4.43% last week

Dear Credit Karma,
I was recently divorced and my ex-husband has an auto loan and my name is still on the debt, how do I go about that debt NOT affecting my credit score anymore?

The only way to remove yourself as a co-signer on this loan is for your husband to refinance the car under his name alone. This new loan will replace the old loan and you will no longer be liable as a co-signer. But in the meantime, any actions– including default or missed payments– taken on the account by you or your ex-husband will damage both of your credit scores. The debt will remain on your credit report as long as you are a co-signer, so have him refinance the loan as soon as possible to protect your credit score.

Dear Credit Karma,
My husband and I share a car – I really need to get my own, but we filed for bankruptcy a year and a half ago. I have poor credit because of that (and struggle with making payments on time). How likely am I to get an auto loan?

While bankruptcy is a tough financial pitfall to recover from, take heart: it won’t haunt your credit forever, and you can get an auto loan, but at a steep cost. If you are set on buying a car now, you will likely resort to a subprime or high risk lender, who cater to borrowers with poor credit, who will likely approve your loan. The real question is not “how likely are you to get an auto loan?”, but “can afford the exorbitantly high interest rate those types of lenders typically charge?”. Check out difference in payments between a poor credit and good credit borrower for a $25,000 loan on a 48-month payment plan:

*interest rates from Five Cent Nickel

That’s a difference of about $89 a month, which adds up to $4,295 difference in payments over the life of the loan. To see what kind of interest rate you’ll be offered and if you can afford it, look up your credit score and compare it to Five Cent Nickel’s auto loan interest rates.

The lesson here is that while you might need the car right now, the extra cost in interest rates over time may be reason enough to hold off on purchasing a car until you have better credit. Tacking an extra car loan payment may worsen your credit and overwhelm you with debt, especially if you are already struggling to make payments on time. Consider alternatives like carpooling, public transportation, or a system of sharing the car with your husband. In the meantime, take the next few months to improve your credit score with healthy credit habits like making on-time payments, using a secured card, and using the money you would have used on a new car to pay off existing debts. Within a year or so, you will have a higher credit score and be able to receive better financing options from lenders.

Submit a question now, and maybe Credit Karma will answer your question on our next Q & A blog post!

When the average rate on 30-year mortgage loans dipped to 4.89 percent, refinancing applications suddenly resurfaced last week with more oomph than we’ve seen in some time. Reuters reports that refinance demand went up 38 percent shortly after the rates dropped. Mortgage brokers advise that refinancing is a good option for homeowners if it will shave off at least $100 from your monthly mortgage payment or can get a full percentage-point rate reduction.

That seems to be the case for many homeowners since the recent drop in mortgage rates spurred some borrowers, who had already refinanced in the last 18 months, to double-dip refinance to save even more money.

This is the second time this year rates have hit below 5 percent, besides this spring’s record low of 4.78 percent. With the large volume of unsold homes sitting on the market, these record low interest rates, and the federal tax credit and home loan programs all coming together in this favorable time, it’s shaping up to be a great environment to consider purchasing your dream home now.

Keep track with us as we continue to monitor mortgage rates , cross our fingers, and hope for more encouraging signs for our economy.

Doubling the tax credit to $15,000

$7,500 wasn’t good enough, $8,000 isn’t doing it currently, so why not go to $15,000? Makes sense, but how about a sliding scale? $15,000 is not chump change, but in California its just a drop in the bucket when you are looking at the house prices in LA and San Francisco. I think it would make sense to modify the credit to be a percentage of the purchase price rather than arbitrarily increasing the total amount.

Expand the pool of eligible homebuyers

Currently there is a large loophole that as long as you haven’t purchased a home in the past 3 years, you are still considered a first time homebuyer. Lawmakers want to expand this even further to include “any buyer of any home”. I like this move, particularly in conjunction with an increase in the tax credit. This casts a much wider net and entices anyone to get back in the housing market.

Extend the timeline of the tax credit

The current deadline for the tax credit is the end of the year. There are various proposals to extend the deadline to at least the middle of 2010. This makes sense, as there is no reason to end the credit at the end of the year with most housing markets seeing a glut of home inventory and very few qualified borrowers.

$3,000 Refinance tax credit

This bill would give a similar tax credit to those who refinanced the mortgage on their primary residence. This additional $3,000 would be available to anyone who refinances. This credit doesn’t make as much sense to me on paper. Those people who have been able to refinance, are doing it to fix their mortgage rate, or potentially save money on their payments by refinancing. They have done this already, or will do this regardless of a $3,000 credit. Refinancing your home simple to benefit $3,000 on your taxes is not a wise choice. The refinance makes sense or it doesn’t, a $3,000 tax credit shouldn’t affect that decision for most borrowers. This type of credit could bring back some of the shady loan practices that were prevalent during the housing boom.

Overall, anything that will encourage prospective homebuyers to get into the market will be beneficial. Increasing the tax credit won’t hurt, expanding the amount of eligible homebuyers won’t hurt, and extending the deadline won’t hurt. The question remains, will all of these things put together finally get the housing market back on track?

One effective solution that may allow you to get off the credit card roller coaster once and for all is to obtain a home equity loan, using it to pay off the high interest credit card debt that you are struggling with. Homeowners can take out home equity loans for a variety of purposes including making home improvements, but why not take a home equity loan out to eliminate your high interest debt instead, making it easier for you to deal with your month to month expenses?

Benefits -

There are a number of benefits that come with credit card refinancing, including a decrease in the interest rates that you are paying. The other primary benefit comes from the fact that you will not be incurring any more debt when paying your credit cards off with a home equity loan, because you are keeping the amount you owe the same, and are moving the debt to a repayment method that is more affordable. If you had previously been fighting to keep all of your payments up to date every month, using a home equity loan to pay your credit cards off will essentially effectively consolidate your debt, making it much easier to pay off over time by allowing you to pay one single loan instead of several.

Here are some of the additional benefits associated with refinancing your credit card with a home equity loan:

- Elimination of variable interest rates by getting a fixed interest rate.

- Potential tax benefits with interest rate write offs on home equity loan interest.

- Consolidation of a number of payments into one single monthly payment.

- Lower monthly payments associated with longer terms and lower interest rates.

- Easier record keeping.

- The ability to write and mail a single month rather than numerous for easy tracking.

Once you pay your credit cards off, put them away and do not use them unless you absolutely have to.

Caveats -

The major downside of this approach is that you are now using your home as collateral for your credit card debt. Should you have a a financial emergency, you could run the risk of losing your home from credit card debt.

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