Newsletter Wednesday, November 13

Key takeaways

  • Refinancing your mortgage makes sense if you can reduce the interest rate by one-half to three-quarters of a percentage point.
  • Improving your credit score is one way to get the best mortgage refinance rate.
  • You can also consider buying discount points or paying your closing costs upfront to whittle the interest rate down.
  • Leveraging competing offers and asking for a rate match are other tactics to lower your loan’s cost.

Mortgage rates have dipped slightly from their peak in 2023, but they’re nowhere near the historic lows seen just a few years ago. Still, if you got your mortgage during the past couple years of higher rates, refinancing could make sense for you if rates drop more.

Ideally, homeowners should consider refinancing if they can shave one-half to three-quarters of a percentage point off a mortgage loan, says Greg McBride, CFA, chief financial analyst for Bankrate. The main aim of a refi, after all, is to lower your monthly mortgage payment and pay less interest over the loan term. So, here are some strategies to score the best refinance rate.

How to get the best refinance rate

Each of these steps can steer you toward a refinance rate that lowers your monthly payments. Keep in mind that approval and your actual rate offer will also depend on your home, location and current mortgage rate trends.

  1. Improve your credit score
  2. Compare refinance rates
  3. Buy points to lower your rate
  4. Decide which loan term is best
  5. Choose a fixed interest rate
  6. Consider the loan amount
  7. Pay closing costs upfront

1. Improve your credit score

Aside from correcting any errors made to your credit report, “there aren’t many ways to quickly improve your credit score,” says Jackie Boies, a senior director of partner relations for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. “Applying good credit practices over time is how you improve your score.”

Such good credit practices include making on-time payments, paying down large credit card balances and applying for new credit judiciously.

Carrying credit card debt has only become more expensive. Since the Fed started raising interest rates, 37 percent of cardholders have maxed out their credit cards or have come close, Bankrate’s Credit Utilization Survey found.

2. Compare refinance rates

When looking to refinance and save, compare as many mortgage offers as possible. Even a fractional difference can save thousands.

When you compare interest rates, consider the APR, or annual percentage rate, as well, which encompasses annual fees and gives you a better idea of the true cost. You may find that the mortgage refi lender with the lowest advertised rate has higher fees and closing costs that actually makes the loan’s APR higher than those of competitors.

If you’re not sure where to start, Bankrate’s online calculator makes comparing current refinance rates in one place easy, allowing you to plug in your preferred terms and a particular loan’s fees, to see how much the refi will cost.

3. Buy points to lower your interest rate

With mortgage points, you pay the lender upfront for a lower rate over the life of the loan. One point is equal to 1 percent of the loan amount.

Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit, says homeowners should negotiate loan terms where possible to lock in the most favorable rates and terms. He adds that borrowers with healthier credit scores have more negotiating power than those with average or low scores.

Getting more than one quote is also important. Bankrate’s McBride says lenders offer a variety of programs, ranging from “no points and out-of-pocket costs with a higher rate to those requiring more points upfront by permanently buying down the rate.” Of course, homeowners should avoid depleting their reserves just to buy down the rate. McBride advises buying points only “if you can spare the cash and plan to be in the loan for long enough to reap the benefit of the lower rate.”

4. Determine which loan term is best

While shorter loans, such as a 10-year fixed or 15-year fixed, carry lower rates than longer loans, the tradeoff is much higher payments — and that can be problematic if a job loss occurs.

“Homeowners shouldn’t stretch and saddle themselves to large payments that limit their flexibility just to save half a percentage point or so,” McBride says. “Maintaining financial flexibility is important.”

A longer mortgage term can help keep monthly payments low, but the loan will be costlier to repay because more interest is charged over time, McClary says.

Along with your regular monthly payment, homeownership comes with unforeseen costs that can add up. Forty percent of homeowners who have regrets about a home purchase cite maintenance and other hidden costs being more expensive than expected as a regret, according to our Homeowner Regrets Survey. Keep in mind the whole picture of home affordability when choosing your loan term.

5. Choose a fixed interest rate

Many homeowners will choose a 15- or 30-year loan when they refinance, but they still need to decide between a fixed or a variable interest rate. The value for homeowners is in fixed rates when there is little difference between fixed rates and the initial rate on adjustable mortgages, McBride says.

“Go for the permanent payment affordability of the fixed-rate loan,” McBride says. A fixed rate can also help consumers budget more easily.

It makes sense to get a fixed-rate loan if you plan to stay in your home for a long time, McClary says. “If it’s possible that rates could drop in the near future or the property could sell before the loan is repaid, a variable-rate loan could be the way to go.”

With a variable or adjustable-rate mortgage (ARM), the interest rate changes at predetermined intervals based on the market and a margin determined by the lender. So, while your interest rate can decrease at those times, it can also increase substantially — making a fixed-rate loan generally less risky and easier to qualify for than an ARM.

6. Consider the loan amount

The more you borrow for a mortgage, the higher your monthly payment will be. A homeowner who gets a mortgage on a $250,000 home with a 4 percent interest rate for 30 years and a 10 percent down payment pays $1,195 a month, while a 20 percent down payment brings that down to $955, Boies says.

“You will want to consider the long-term savings over the life of the loan,” he adds.

While it is easy to get confused when presented with all the options for refinancing a mortgage, there are many resources available for help. “A HUD-approved nonprofit agency affiliated with the National Foundation for Credit Counseling can offer some expert advice and direction for making the right decision,” McClary says.

Borrowers need to fully understand the terms of their mortgage loan, as well. Utilize online calculators to help make decisions and find a mortgage that best suits your needs, Boies says.

7. Pay closing costs upfront

The closing costs you’ll pay vary by lender, loan amount and location, but it’s generally 2 to 5 percent of the new loan amount. So, if you want to refinance a $400,000 home loan, you’ll typically pay $8,000 to $20,000 in closing costs. You may be able to negotiate these expenses to some extent.

Some lenders offer to roll closing costs into the loan, but there’s a catch. You’ll likely have to pay a higher interest rate to secure a no-closing-cost refinance loan, which means your mortgage payment will be higher. Furthermore, you’ll pay the lender more in interest because you’ll be paying interest on these closing costs over the loan term.

To illustrate, the lender could offer to refinance your $400,000 home loan with a 30-year term at 6 percent APR, charging you $13,000 in closing costs. Or you could get a no-closing-cost refinance with the same loan term, but with a 6.5 percent APR.

If you go with the refinance that has the lower interest rate, you’ll pay $1,919 per month in principal and interest and $370,682 in interest for the loan’s duration. But if you opt for zero closing costs, your monthly mortgage payment will increase to $2,023, and you’ll pay a total of $407,182 in interest.

FAQ about getting the best refinance rate

Bottom line

You can score the best refinance rate by cleaning up your credit before you start applying, and by paying closing costs upfront once you get a loan.

But the main point: Shop around. Taking the first refinancing offer you find is rarely the best idea. Bankrate’s refinance rate table offers the opportunity to compare rates, get a sense of trends, and shop for a mortgage refinance online before formally applying with a lender. So if you see a good deal, you can strike while the iron is hot.

Read the full article here

Share.
Leave A Reply