If you’re looking to refinance your mortgage, now’s not the time to sit on the fence. In March, the Federal Reserve issued emergency rate cuts and by May, mortgage rates dropped to a new record low. With interest rates at historic lows and lending standards getting tougher amid the pandemic, refinancing your mortgage might just be a no-brainer. After all, saving money from a refinance can make a significant difference in your monthly payments and even the time it takes to pay off your loan.
But not so fast, don’t rush to refinance without researching your refinancing options carefully. The one-size-fits-all theory doesn’t apply to mortgage refinance rates. It's crucial to take time to find out how to get the lowest mortgage refinance rate. After all, you don’t want to make a hasty decision and end up with a higher interest rate than you should have, leaving thousands of dollars in savings on the table.
Find out below how to get the most bang for your buck when it comes to mortgage refinancing rates.
5 ways to get the lowest mortgage refinance rates
1. Shop and compare multiple lenders
Just like you wouldn’t go out and buy the first house you tour, don’t go for the first lender and mortgage rate you find. Look around and get rates from different lenders because you never know what others have to offer if you don’t do your research. Online marketplace Credible is a great resource when it comes to comparing multiple lenders to ensure you'll meet your financial goals. Find out how much you could save by refinancing now.
Don’t be afraid of getting multiple online quotes to refinance a mortgage and even to use them as leverage to pit mortgage refinance lenders against one another to compete for your business.
2. Make sure you have the best credit score possible before applying
This makes knowing your credit score beforehand even more important. Mike Dulla, president of United Home Loans, said that “clients will typically be able to secure the best rates for conforming refinances (loans of $510,400 or less) with a 740 or higher credit score.”
WHAT CREDIT SCORE DO YOU NEED TO BUY A HOUSE?
3. Lock in the rate you desire when you find out — not when you’re ready
Don’t chance losing a low mortgage refinance interest rate during these unpredictable times. Lock it in soon as you can, because the rate and payment lenders are offering is subject to change until then. Using Credible's free online tools, you can find out which rates you qualify for within just minutes (without any impact on your credit score).
This means after you’re approved for the loan go ahead and accept the offer so the rate won’t change. A rate lock typically lasts about 30 days. This helps ensure your rate will remain the same from the time they give you an offer and the time it takes the loan to close.
4. Pay attention to your loan-to-value ratio
You will get the best rates with a 40 percent home equity position (60 percent loan-to-value), said Dulla. He added that you will still get great rates with loan-to-value ratios of 95 percent or under, but the more equity in your home the better. “Sometimes it may make sense to pay the loan balance down a bit if it will improve the rate. After all, the eventual goal is to pay these things off,” he said.
5. Change the mortgage terms
This means you may want to do away with the traditional 30-year fixed mortgage. One way to get a better rate is to consider a 15-year or 20-year fixed rate.
Dulla explained that 15-year fixed interest rates are in the mid to high 2s right now. “You pay way less interest compared to a 30-year fixed," he said. Not to mention a shorter loan term will help you pay off your existing mortgage much faster.
As a bonus tip, if you don’t need it, don’t take more than $2,000 cash out in your refinance. Cash-out refis are not in favor right now with Fannie Mae, Freddie Mac and several banks, said Dulla. “You will pay a higher interest rate for a cash-out refinance. If you get more than $2,000 back at closing, Fannie Mae and Freddie Mac will consider that a cash-out refi,” he said.
He advised buyers to watch out for points and other high closing costs and to make sure their employment is somewhat COVID-19 proof. Lenders are required to verify employment the day of or day prior to closing. He said if you are concerned about your current job, make sure you discuss that with mortgage lenders or a financial advisor.
But most importantly, don’t delay. It's a great time to refinance a mortgage now.
“Sometimes we see borrowers get a little greedy and try to time the absolute bottom of the market,” said Dulla. “If you can save $100 or more per month now and pay limited closing costs, it probably makes sense.”