Refinancing your mortgage? This is how to get the best rate
With rates still hovering near record lows, these steps will help you secure the best mortgage refinance rate possible. (iStock)
Although the coronavirus pandemic has put a strain on the average American’s finances, one silver lining is that the current refinance rates dropped to record lows. This presented an opportunity for homeowners to refinance their mortgage and ultimately pay less in interest expenses over the term of their loan.
You may have noticed that mortgage rates are starting to increase, but that’s no reason to panic. These rates are still hovering just above historic lows, and homeowners interested in a mortgage refinance still have plenty of time to qualify for great rates. Take advantage of this by visiting Credible to compare mortgage and refinance rates across multiple lenders at once.
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It’s important to note that not all homeowners will be offered the lowest current mortgage interest rates. Lenders evaluate a homeowner’s financial history before issuing a new refinance rate. To ensure you’re getting the lowest mortgage refinancing rate possible, consider these tips:
1. Improve your credit score
While your previous credit score may have been high enough to secure your initial home loan, your current credit score may not be at the level necessary to secure the lowest mortgage refinancing rate available. Many lenders will require a credit score of 620 or higher to refinance your mortgage. Having excellent credit can ensure you qualify for the lowest fixed refinance rate.
Take steps to raise your credit score before applying for a refinanced loan by checking your credit report for errors, paying your bills on time, and keeping your credit card balances below 30% of your allotted credit limit.
2. Improve your debt-to-income ratio
Just as your credit score influences your refinance rate, so does your debt-to-income ratio. This ratio is your total monthly debt payments divided by your monthly income. You should aim to keep your debt-to-income ratio between 40% and 50% to be eligible for the lowest refinance rate possible. Paying down your existing debts will lower your ratio.
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3. Compare rates and lenders
Think your bank will give you the best mortgage refinance rate? Think again. You should approach mortgage refinancing with the same strategies you use when making any other major financial decision: shopping around and comparing offers. It’s wise to compare current mortgage refinancing rates from lenders like your local bank or credit union, as well as requesting offers from online mortgage lenders.
You can explore all of your options by visiting Credible to compare refinance rates and mortgage lenders.
4. Consider a shorter loan term
When considering a home mortgage refinance, many homeowners focus on the rate itself and neglect the loan term. In the event that you cannot qualify for the lowest rate available, you can still save significant amounts of money by refinancing for a shorter loan term.
Shorter-term mortgage loans, such as a 15-year-fixed-rate loan, can help you pay off your mortgage faster while paying less in overall interest fees. In most cases, a shorter loan will cause your monthly mortgage payment to rise, but homeowners with a high existing interest rate may actually see their monthly payments drop thanks to a lower refinance rate.
Determine your potential monthly mortgage payment using Credible's mortgage calculator.
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5. Be prepared to lock in a low rate; don’t wait for it to drop to another record low
Comparing mortgage interest rates and lenders is one of the best ways to find the lowest rate, but that doesn’t mean you should wait until rates hit record lows once again. Although the Federal Reserve plans on keeping rates low through 2023, lenders may refrain from offering the lowest rate available. Interest rates will continue to fluctuate over the next two years, and current projections suggest that these rates will rise a little over the next few months. Because even the slightest rate changes can significantly increase your overall interest payments, it’s important to lock in the lowest rate offered after comparing multiple lenders.
Keep in mind that, although these low rates are tempting, now may not be the right moment for all homeowners to refinance their mortgage. For example, if you’re not planning on living in the home long enough to break even on upfront closing costs, this may not be the right financial decision for you. This is especially true if your new loan would lower your interest rate by less than 1%.
However, if you’re in good financial shape, now is still an excellent time to consider refinancing your mortgage for a lower interest rate. Visit Credible to get in touch with experienced loan officers who are ready to answer all of your mortgage refinance questions.
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