Reasons people don't refinance - but should

Doubt you'll qualify to refinance your home loan to a lower rate? You just may be mistaken.

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Common refinancing roadblocks
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Common refinancing roadblocks

If you've thought about refinancing, but had concerns about whether you'd qualify, it may be time to take another look at your options.

Why? With interest rates on the rise, it's worth finding out if you'll qualify to take advantage of these rates that are still relatively low compared with years past.

In fact, interest rates crept up to 4.07 during the week ending May 31, 2013. But if you compare that with the average rate from June 2008 - which was 6.32 percent - rates are still fairly low.

So if you find yourself facing one of these common refinancing obstacles, read on for some solutions to consider...

You Don't Have Any Equity in Your Home

If you worry that having low equity or no equity in your home could be a barrier to refinancing, you're mistaken.

"If you think you won't qualify for a refinance because you're underwater in your mortgage (you owe more than your home is worth), there is help available," says Andrew Schrage, owner of the personal finance website Money Crashers.

For example, "[t]hrough the government's HARP 2.0 program, you may qualify for a refinance even if your loan-to-value ratio is more than 125 percent," Schrage explains.

And according to Tim Dwyer, a housing expert and CEO of Entitle Direct Group, a title insurance company that sells directly to consumers, qualified homeowners can see significant savings by taking advantage of refinancing through HARP.

"HARP is a great program because there is no appraisal required and historically, homeowners who refinanced using this program on average saved 35 percent on their monthly mortgage payment," Dwyer says.

But, be aware that there are qualifications you must meet to be able to take advantage of HARP. "Your loan must be held by either Freddie Mac or Fannie Mae, and there are other requirements as well," says Schrage.

[Click to compare interest rates from multiple lenders now.]

You Have Bad Credit

Is your credit rating less than stellar? While your credit score affects the interest rate a lender offers you, credit score standards seem to be lowering.

A recent report from Ellie Mae, a nationwide residential mortgage solutions provider, finds that the average approved borrower credit score of applicants borrowing from banks and private insurers has decreased in the last couple of years.

In fact, the average credit score in March 2013 was 743 - the lowest it has been since August 2011, when it was 741, according to Ellie Mae.

So it's no surprise that Schrage thinks now is a good time for homeowners with less than perfect credit to talk to their lenders about refinancing.

[Shop around and compare mortgage interest rates from lenders now.]

You Can't Afford the Closing Costs

If you don't have enough money saved to cover closing costs, refinancing may seem out of reach. However, our experts say it may still be worth your time to explore a couple of different options.

One of these options is a no-cost refinance, according to Schrage. However, he warns the mortgage will likely come with a higher interest rate.

"It would make financial sense for you to utilize a no-closing-costs mortgage if you plan to stay in your home for fewer than five years," Schrage suggests. This is because the extra money you spend on the higher interest rate for five years is less than the typical closing costs on a mortgage refinance.

Keep in mind, however, that even if you're not planning to move within the next few years, if the interest rate on a no-cost refinance is still lower than your current mortgage interest rate, then it can still be worth refinancing because you'll save money in interest in the long run.

If you don’t like the sound of a "no-cost" mortgage, here's another option to consider: "Homeowners may be able to roll the closing costs into the mortgage by increasing the size of the loan," he says. So for example, if your loan amount is $300,000 and your closing costs are $12,000, your new loan amount will be $312,000 instead.

Regardless of which strategy you decide to go with, Schrage points out that homeowners should ensure that the savings from refinancing still makes sense given the higher interest rate or larger loan balance that accompanies these two refinance strategies.

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