Times aren't great in the mortgage refinancing market. According to the October 2018 Origination Insights Report from mortgage application software provider Ellie Mae, refinancing homes make up 32% of October's closed mortgages – continuing a drop in refis that began five to six months prior.
It's likely that mortgage rate increases are to blame for the decline in refis. The drop roughly corresponds to 30-year fixed mortgage rates breaking the 4.5% mark in May for the first time since January 2014.
Refinancing generally only makes sense when you can acquire a better interest rate than your current rate. After years of historically low interest rates, it's less likely that you can find rates suitable for refinancing – unless you have improved your creditworthiness since taking out your original mortgage.
Lenders might be tempted to ease refinancing standards to increase share, but so far that hasn't happened. The average FICO score for closed mortgages is holding steady at 727 for the second straight month, an increase of three points from October 2017. Loan-to-value (LTV) ratio averages are at a typical 79%, meaning that the average borrower has more than 20% equity in their purchased home.
It's not impossible to get refinancing with a low credit score – but it's not easy. Just over 14% of October's refinancing loans were granted to consumers with credit scores below 650, with 10% of those in the 600-649 range.
It's even tougher to get a new mortgage with poor credit. Less than 10% of new mortgages in October were granted to borrowers with scores less than 650.
If you're getting ready to enter the housing market, with either a refi or a new purchase, you must keep your credit score as high as possible. Have you checked your credit score lately? Are you above or below the average score for October mortgages? You can check your credit score and read your credit report for free within minutes by joining MoneyTips. Review your credit reports for errors or some signs of fraud because you may just actually deserve a better credit score than you have.
If your score is lacking, you have a decision to make. With a lower credit score, you may have trouble qualifying for a mortgage and will pay higher interest rates if you do qualify. Would you be better off waiting and building up your credit score? The decision isn't straightforward because housing prices and interest rates are both increasing.
How do you raise your credit score and maintain it at a high level?
Make sure all your bill payments are made on time. Payment history is one of the most important factors used to calculate your score.
Keep spending under control to keep credit usage low. Credit utilization – the amount of credit you use compared to your credit limit – is another important factor in credit score calculations. As a rule of thumb, keep your credit utilization below 30%. Aim for 10% or less if that's feasible.
Resist the urge to open new accounts or close old ones. Closing old accounts that are in good standing shortens your credit history and dings your credit score. Applications for new lines of credit will also slightly drop your credit score, and requests for new credit may make existing creditors wonder why you need more credit.
Whether or not you're entering the housing market, give your credit status a thorough review. Can you improve on your current credit score? Make the effort today and enjoy financial benefits tomorrow.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.