- The Washington Times - Thursday, December 16, 2004

Q: I am considering refinancing my first and second trust to lower my monthly obligations. My fourth child was just born, and we have decided that my wife will stay home for the foreseeable future. After child-care expenses, there’s not a lot left over from her paycheck.

I have a good, stable job with a salary that will be increasing by at least 15 percent per year. The problem is that right now, we have maximized our credit cards and are having

trouble meeting our

monthly payments.

We spoke to a loan officer who said that our credit score was 625, which isn’t high enough to get a loan.

I don’t understand this because we have a perfect payment history on all accounts. Our first-trust loan is at 6.25 percent, amortized over 30 years, and our second-trust rate is 7 percent, amortized over 15 years.

We want to refinance to an adjustable rate with an interest-only payment, as this will give us some breathing room for the next couple of years. Any advice would be greatly appreciated.

A: First of all, it sounds as if you spoke with an inexperienced loan officer. I think I can give you some thoughts on how you might want to accomplish your objectives. But let me first comment on a couple of things that you need to try to accomplish.

Your situation is not uncommon. A financial squeeze is virtually inevitable for growing families who switch from a double income to a single income. Much of the income disappears while expenses grow along with the family.

The first thing you should do is sit down with your wife and examine your monthly expenses. It may be difficult, but find areas where you are able to cut back in spending. Send out cheap Christmas cards this year instead of ones with the fancy family photograph. Dine out less often. Brown-bag your lunch every day instead of buying an overpriced sandwich at the deli.

There are lots of ways to curtail household expenses; you just have to think about it.

Your credit score is 625, which isn’t great, but it’s not terrible either. Without looking at the report, I can make a pretty safe guess that the score is low because your outstanding debt is almost equal to your allowable credit.

In other words, you’re maxed out, as you said. Remember that credit scores are supposed to be a comprehensive gauge to determine one’s overall credit risk. Your score is low not because of any previous late payments but because you are perceived to be heading toward an inability to make timely payments.

The first course of action is to find a way to curb your spending.

The second course of action is to look into the possibility raising your score.

This is typically a difficult thing to do if the low score is a result of untimely payments. Often called a “rapid rescoring,” it’s surely within the realm of possibility if your score is low due to being maxed out on your credit cards.

Ask trusted sources such as family members and friends for a recommended mortgage broker. A good loan officer will be able to help you through the process.

Typically, this involves contacting your credit-card issuers and requesting that they increase your limits. If you can get this done, the loan officer will request evidence in writing by the card issuers, and he will then work with the credit agency to increase your score.

An increased score will often result in a larger choice of eligible mortgage programs and a better interest rate.

If you find that you are unable to bring up your score, you should still be eligible for some refinance programs that will lower your outgoing cash flow. My advice would be to take out an ARM with an interest-only payment feature that carries a fixed rate for a minimum of three years, which should be long enough to stabilize your situation.

Consider converting your second trust to a 30-year amortized loan. These changes would dramatically reduce your monthly obligations and help you through the rough patch.

But I can’t emphasize it enough: Curtail your spending habits at the same time.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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