8 Ways to Get the Best Mortgage Refinance Rates
Many people are considering refinancing their mortgages to take advantage of near-historic low interest rates. Mortgage refinancing replaces your existing home loan with a new loan (and new terms). It’s a great opportunity to get a lower interest rate on your mortgage and potentially save significant cash over the lifetime of your loan. Just like a regular mortgage, the terms you qualify for depend on your situation. There are several ways to get the best possible mortgage refinancing rate.
- Keep a good credit score
Like most financial activities, having a good credit score makes getting a good mortgage refinance rate much easier. Boost your credit score by keeping a balance below 25% of your limit. Asking your bank if you qualify for a higher credit limit is one easy way to quickly boost your score. If you have credit debt, it’s important to pay it off as soon as you can. However, you should still keep using your credit card and paying it off in full each month. Responsible credit usage improves your score, while closing out your card entirely can harm it.
- Lower your debt-to-income ratio
If you have significant debt, such as auto loans, student loans, or credit card debt, in comparison to your income, it could be a red flag to lenders and a hindrance when you try to refinance your mortgage. A high debt-to-income ratio may signal that you are already stretched thin with existing financial obligations. Everyone is in different places in their financial journey, but if you currently have high debt compared to your income, it may be smart to pay off as much as you can before attempting to refinance.
- Ask for a shorter loan term
Depending on how many years you’ve already owned your home and how many more you plan to stay, it may not make sense to take on another 30-year fixed rate mortgage. Moving to a 15 year term can lower the interest rate and, as a result, lower the total interest you pay over the life of the loan. It’s important to note that your monthly payment will increase, but you’ll be earning equity faster.
Some people believe that if they only have fifteen years left on their mortgage, it doesn’t make sense to refinance. However, you can save a significant amount of money even if your loan is more than halfway paid.
- Refinance to an adjustable-rate mortgage (ARM)
If you know you don’t plan to keep your home for a long time, an adjustable-rate mortgage (ARM) may be a better choice than a fixed-rate option. Adjustable-rate mortgages typically start with lower rates, which are then periodically adjusted based on an index which reflects the marketplace. ARMs can be unpredictable and risky for buyers planning to stay long-term. However, they could be a great option if you plan to sell your home before the first rate adjustment.
- Lock in your rate
A mortgage rate lock prevents increases in interest rates from impacting your mortgage rate while the loan is being processed. Since the refinancing process can take a few weeks or even months, it’s smart to at least inquire about this. This year is a perfect example of how quickly interest rates can change. By locking in your rate, you ensure that external economic factors won’t affect the terms of your loan.
- Shop around
Comparing rates from multiple lenders is a smart strategy, but you have to take an informed approach. According to Freddie Mac, borrowers can save $3,000 over the life of a loan by getting five additional rate quotes. Speaking to multiple lenders gives you the opportunity to understand the marketplace and even negotiate.
However, if an offer seems too good to be true, that may be the case. Be sure to review the fine print and look for details like discount points and APR. It’s easy to be swayed by a great interest rate, but that does not reflect the full cost of your loan.
- Pay discount points
Discount points essentially allow you to pay a portion of your total interest expense upfront in exchange for a lower interest rate. The longer you plan to stay in a home, the more you might benefit from paying discount points. This strategy is also called “buying down the rate” and is most often used by buyers purchasing their forever home. To decide if paying discount points is a good idea for you, try running the numbers in an online calculator.
- Don’t cash out your equity
A cash-out refinance replaces your current mortgage with a new home loan that is higher than the amount you owe on your home. You will receive the difference in cash, which you might use for home upgrades, debt consolidation, or other financial needs. To employ a cash-out refinance, you must have equity in your home.
This can be tempting, especially if you have a large expense coming up or would like to do some renovations. However, cash-out refinances are rarely advised. A cash-out can cause a higher mortgage rate by raising your loan-to-value ratio and debt-to-income ratio. If you want to renovate your home, it’s usually better to save up or take out a separate loan. A cash-out refinance should be considered a last-resort for financial needs, not a refinancing strategy.
Refinancing your mortgage could be a great decision if current interest rates are lower than your existing loan and you are in the position to do so. Don’t forget, you’ll be required to pay closing costs and other fees throughout the process. When deciding if refinancing is right for you, consider your financial standing and talk to a few lenders about what you might qualify for. Compare the refinancing offers to your existing home loan and calculate how much you’ll save, remembering to include closing costs. You should only refinance if you are confident you’ll save money by doing so. There are many ways to refinance and it’s important to come informed and prepared to any conversation relating to your financial health.
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