Refinancing your home to score one of today’s historically low mortgage rates has been one of the hottest homeowner trends of the pandemic. Lenders have been swamped with refi applications since last March, when the Federal Reserve shaved interest rates down to the bone as COVID-19 began its rampage in the U.S.
As rates continue to hover near all-time lows, homeowners still have a major incentive to refinance and score savings. If you own a home and haven’t refinanced in the last year, you’re probably overdue.
But you can find wide differences in refi rates from one lender to another, and there’s no guarantee you’ll bag the cheapest rate out there. These five tips will help you feel confident you’re getting your best deal when refinancing into a fresh 30-year mortgage.
1. Gather mortgage offers and compare rates
Refinancing into another 30-year loan can be the right choice if your current mortgage is relatively young. You won’t be stretching out your interest costs all that much if you’ve been in the home just a year or two.
Rates on 30-year fixed-rate mortgages are currently averaging just 2.73%, according to the long-running weekly survey from mortgage giant Freddie Mac. You could be an excellent refi candidate if you have a mortgage you took out last year at this time, when the average was a steeper 3.47%.
To find your best refinance deal, you’ve got to shop around and compare rates from several lenders. A Freddie Mac study found if you get five rate quotes, you’ll pay lifetime costs averaging $3,000 less than if you see only one loan offer.
An estimated 16.7 million Americans could refi and drop their interest rates enough to slash their monthly payments by an average $303 each, according to research released this month by the mortgage technology and data provider Black Knight.
2. Polish up your credit score
A better credit score brings better mortgage rates. Lenders like borrowers whose credit scores are very good (in the 740-to-799 range) if not exceptional (800 to 850).
To get the kind of refinance loan that will save you hundreds of dollars a month, you’ll need a score of at least 720, Black Knight says.
Don’t know your credit score? It’s easy enough to get a peek at it for free.
If you find your credit score needs some help, take steps to raise it:
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Pay down your other debt, especially on credit cards. A debt consolidation loan might help you get rid of credit card debt more quickly, and at much lower interest.
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Don’t open new credit cards, but don’t close old ones either. If you cancel cards, you’ll reduce your available credit — and that could hurt your score.
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Get your hands on your credit reports and make sure there are no errors dragging down your credit score. An analysis by the U.S. Public Interest Research Group has found complaints to the government about credit report errors have surged to record levels during the pandemic.
3. Show a lender you’re invested in your home
A bigger down payment can get you a lower rate.
Refinancing homeowners who have healthy amounts of equity in their homes tend to score the cheapest refinance rates. Equity is the percentage of your home’s value that you own, through the payments you’ve made so far.
To a lender, the ideal refi candidate has at least 20% equity, Black Knight says. If you still have a ways to go to reach the 20% level, you’ll want to make a mortgage down payment that will put you over the line.
As an added bonus, when you’ve got at least 20% equity in your home you won’t be forced to buy or keep paying for private mortgage insurance.
Private mortgage insurance offers a lender protection in case a borrower defaults. It’s not to be confused with homeowners insurance — which offers you protection if your house is damaged by fires, tornadoes and most other types of disasters.
You should already have home insurance — it’s vital, and most lenders require it. But each time your homeowners policy comes up for renewal, go online and gather a bunch of competing quotes so you can feel confident you’re not overpaying for your coverage.
4. Be willing to pay ‘points’
The optional fees known as “discount points” are a type of upfront payment that can help you bag a low 30-year mortgage rate. One point equals 1% of your loan amount and can lower your rate by as much as one-quarter of 1 percentage point, say from 3.2% down to 2.95%.
The truly jaw-dropping mortgage rates often — though not always — come with points.
You’ll need time to break even on the points and other closing costs before you can truly start enjoying the savings from your low mortgage rate.
Lenders have their own individual pricing structures, so don’t make the assumption that a loan with points will always have the lowest rate out there. You might find another lender offers a loan with zero points and a better rate.
It’s another good reason to seek multiple loan offers and review them side by side — to make certain you get the best mortgage rate you can.
