A 2.5% rate on a mortgage refi? It’s possible, and here are 8 ways to ensure you get the lowest rate
Mortgage refi rates continue to hover around record lows — some 15-year refi rates are near 2% and some 30-year rates are below 3% — but it will take some finessing to get the lowest rates possible. So we asked experts for the best ways to get the lowest refi rates, and who a refi does, and does not, make sense for.
1. Pull copies of your credit reports, and work on increasing your credit score
Greg McBride, chief financial analyst at Bankrate, recommends pulling copies of your credit reports first in order to make sure there are no errors that could torpedo your chances of approval. To raise a credit score, check your credit report for errors (and dispute them), pay bills on time and reduce the amount of debt you owe. Also, it’s important that you don’t apply for too many new credit lines or loans when trying to get a mortgage as this can ding your score. Here are more details on the credit score you need to get a low rate.
2. Get your finances in order
Lenders consider your debt-to-income ratio — to calculate your DTI ratio, divide your total monthly debt payments on student loans, credit cards, car loans, rent or mortgage, auto loans and child support by your gross income — when determining what rate you might qualify for. If your total monthly debt payments are 36% or less of your income, it’s a favorable sign, experts say. “The mortgage lender might turn down a borrower with lots of credit card, auto and student loan debt while approving a borrower with no other debt — even if they make the same salary,” says Holden Lewis, home and mortgage expert at NerdWallet. Paying down debts, if you can, before you apply for a refi could yield you a lower rate.
3. Build your savings
The more savings a borrower has, the better. Lenders consider those with more savings less of a risk in terms of defaulting on a loan, and therefore award them with better interest rates.
4. Get quotes from 3-5 lenders, including your current mortgage lender
“Most importantly, shop around. Terms can vary and not every lender is offering the same deal. You won’t know whether or not you’re getting the best deal possible unless you’ve shopped around to see what’s out there,” says McBride, who notes that you should look not only at the interest rate but also at the fees and closing costs.
“Going through a full refinance can take time and typically requires the borrower to pay for closing costs on the new loan. Lenders want to retain your loan, especially larger, jumbo loans, so always start by calling your current lender and see if they are willing to modify the interest rate on your existing loan. This can be a simpler, faster way to save borrowers time and money,” says Paul Appleton, head of consumer lending at Union Bank.
5. Gather your rate quotes on the same day
Denny Ceizyk, senior staff writer at LendingTree, suggests gathering all your rate quotes on the same day, and not falling for the “give me your best quote and I’ll match it or beat it” sales pitch. “Rates fluctuate daily and lenders should be able to give you their best rate out of the gate. Make sure you compare … the lenders fees and the interest rate they offer, and don’t forget you can shop your own title company on a refinance, which means you should haggle on those fees as well since lenders can send business to whichever title company you prefer,” says Ceizyk.
6. Explain why you’re refinancing
“To shop effectively, make sure you can explain why you want to refinance. People refinance for various reasons, to shorten the loan term, to get the lowest possible monthly payment, to extract cash from home equity with a cash-out refi, or as part of a divorce settlement. By explaining what your refinance is for, you’re giving the lender a chance to personalize your refi with suitable rates and terms,” says Lewis.
7. Consider a shorter loan term
You can get a lower rate on, say, a 15-year refi than a 30-year refi: Some 15-year refi rates are near 2% and some 30-year rates are below 3%. While shorter loan terms mean paying off your home quicker and with less interest, shorter loan terms often mean paying higher monthly payments. When considering this option, make sure you’re able to take on a larger sum each month.
8. Lock in your rate
Depending on what’s happening in the world and the markets, mortgage rates fluctuate. Because even a tiny amount of movement can mean thousands of dollars, locking in a rate when you get a low one can prevent your rate from being affected by rising rates during the loan processing period.
Does a refinance make sense for you?
Refinancing your mortgage means starting a new loan, and with a new loan comes costs and fees. That’s why, the traditional rule of thumb is that it makes sense to refinance if your new rate is roughly 1% or more below your current rate, says Lewis. Additionally, you’ll want to make sure the break-even point of your refinance makes sense (calculate that by dividing the total loan costs by the amount of savings, so if costs are $5,000 for a refinance that will save $200 each month, then the break even point is 25 months).
