Strategies to get a lower rate
Getting a low refinance rate is both an art and a science.
Certain strategies work, and some don’t. Each situation is different, and the stakes are high.
Sure, rates are hovering near 3-year lows, but that doesn’t mean lenders will just give you their best possible deal and call it a day.
In some cases, you have to poke and prod for your best rate.
So, how do you do that?
With the right knowledge, you can approach your lender with confidence, knowing how to compare one offer with another, and even use one offer against the other.
Ready to get the best mortgage refinance rates? Here’s how.
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Steps you can take now to find the best mortgage refinance rates
- Make sure your credit and debt are in check
- Compare multiple loan quotes
- Consider discount points to lower your rate
Make sure your credit and debt are in check
To get the best rate from any lender, you should have a good credit score and a low debt-to-income ratio. In 2018, credit scores and DTIs were the two main reasons why lenders denied refinance applications.
Lenders offer the best rates to borrowers who have a track record of paying their bills on time and managing their debt.
So, you’ll want to make sure your financial house is in order by checking your credit report’s accuracy and calculating your DTI before you start shopping for the lowest refinance rates.
Keep in mind that a less than ideal credit score or above-average DTI doesn’t necessarily disqualify you from a mortgage refinance — but it means you won’t be able to get the best rates and maximize your savings.
Compare multiple loan quotes
You can get as many mortgage refinance quotes as you want. But unfortunately, many borrowers only get one quote or apply with one lender.
By requesting a quote from just one lender, you could be leaving thousands — if not tens of thousands of dollars — in savings behind.
Fortunately, the internet makes it easy to obtain quotes from multiple lenders.
But here’s the kicker: you can’t just get multiple quotes. You must show the quotes to the other lenders.
Chances are that high quotes will come down. Lenders will lower their rate and/or fees to keep your business. Savvy shoppers come out on top when they use multiple quotes to their advantage.
Should you buy discount points to lower your rate?
Most lenders let you “buy down” your interest rate using what are known as points. Each point you buy costs 1 percent of your loan amount. In most cases, buying one point will reduce your interest rate by 0.25%.
For example, if your new refinance loan amount is $200,000, and you decide to buy one point to lower your rate by 0.25%, it will cost you an additional $2,000 at the closing table.
So, how do you know if buying points is the right move?
First, if you can’t make a large upfront payment to the lender, then you’ll probably want to stick with the quoted rate.
If you can’t make a large upfront payment, you’ll probably want to skip discount points and stick with the quoted rate.
If you can afford a larger upfront payment — and your ultimate goal is to get an ultra-low rate — you might consider buying down your rate.
Let’s look at the $200,000 refinance loan amount example with a quoted rate of 3.75% and no points. At 3.75%, your monthly principal and interest payment would be $926.
You decide you want a lower rate. But is it worth buying one point to lower your rate to 3.5%? At 3.5% on the same $200,000 refinance loan, your monthly principal and interest payment would be $898 — saving you $28 each month or $10,000 over a 30-year loan.
However, you’ll need to bring an additional $2,000 to the closing table to pay for that point.
|Refinance loan amount||$200,000||$200,000|
|Cost of discount points||$0||$2,000|
|Total P&I savings||—||$10,000|
|Time for savings to break even||—||71 months|
But keep in mind that most people don’t keep a mortgage for 30 years. So instead of looking at lifetime savings, look at your break-even point.
If you divide the amount you paid for one point ($2,000) by the amount you’ll save each month ($28), it would take you 71 months to break even on the upfront costs (2000/28=71).
The bottom line: It will take you nearly six years to recoup the $2,000 paid for a lower rate.
If you plan on staying in your home for longer than six years after you refinance (and you can afford an additional $2,000 upfront), you’ll save money over the life of your loan.
Keep in mind the example only covers principal and interest payments and doesn’t take into consideration any taxes or insurance that may be included in your monthly payment.
Which refinance rate should you choose?
After you receive your loan quotes, you have to decide which offer aligns with your refinance goals. You might think the lender offering the lowest rate is the obvious choice, but that isn’t always the case.
When you’re shopping for the best refinance rates, you’re also shopping for closing costs. The two go hand-in-hand.
When you’re shopping for mortgage refinance rates, you’re also shopping for the lowest closing costs.
While Lender A might be offering a rate of 3.5% compared to Lender B’s 3.75%, Lender A might charge more in closing costs.
There’s a chance Lender B’s rate of 3.75% may be more affordable than the 3.5% offered by Lender A if you’re paying less in closing costs. So, how do you find out?
Read your loan estimate carefully to find the best refinance rate
When you start applying with mortgage lenders, you’ll receive a loan estimate. This estimate includes a complete breakdown of the costs associated with your loan.
When you receive your estimate from each lender, you’ll want to do an “apples-to-apples” comparison.
That means comparing your loan estimates dollar by dollar and line by line.
Luckily, loan estimates are pretty straight-forward and easy to read. All lenders use the same format.
The first page will show your loan details, as well as your quoted interest rate, monthly principal/interest payment, and projected payments over the life of the loan.
Sample loan estimate. Image: ConsumerFinance.gov
Page two of the estimate breaks down the costs associated with your loan.
Group A will show the lender’s loan costs and origination charges. Group B shows the costs you can’t shop for, such as the appraisal fee, credit report fee, flood determination fee and other related fees.
How to compare loan estimates
When you’re comparing closing costs, pay close attention to costs in Group A. These are the fees to look at when doing a side-by-side comparison.
Sample loan estimate. Image: ConsumerFinance.gov
The fees listed in Group B are predetermined, so it isn’t necessary to compare them when you’re reviewing each lender’s loan estimate.
The total you pay in closing costs will determine if Lender A’s 3.5% rate is actually less expensive than Lender B’s 3.75% rate.
If you plan on rolling your closing costs into your loan, you could wind up paying more each month on a loan with lower interest and higher closing costs than you would on a loan with a higher rate with lower closing costs.
Remember your refinance goals
When you’re trying to decide which refinance rate you should choose, you should think about what you’re trying to accomplish by refinancing your mortgage.
If your only goal is to lower your interest rate to reduce your monthly payment, you can easily narrow your choices down to the lender offering the lowest rate with the lowest closing costs.
If finding a loan with the lowest upfront cash requirement is your goal, then you may consider asking the lender with the lowest costs to roll them into your loan at a slightly higher rate. If the lender agrees, you may not be required to bring any money to the closing table.
Finding lenders with the best refinance rates
If you’ve been shopping for the best mortgage refinance rates, you’ve probably noticed they vary from lender to lender. In some cases, they vary by a lot.
So, why does Lender A offer an interest rate of 3.5% while Lender B offers a 3.75% rate?
There are many reasons, such as current economic conditions, how quickly mortgage rates change each day, how the bond market is faring, and more. Rates can change on a daily basis.
Lenders don’t offer a “one-size-fits-all” refinance rate. Your rate won’t always match what the company advertises.
Also, lenders don’t offer a “one size fits all” interest rate. No lender will offer low rates to everyone who wants to refinance their mortgage — regardless of what their advertising says.
So, to find the best refinance rates, you should get quotes from several lenders for the same type of loan (supply each lender with the same information).
A good rule of thumb when shopping for the best mortgage refinance rates is to know your target number before you start looking.
If you know beforehand how much you want to drop your rate and monthly payment, you’ll have a good idea of how much it will cost you (and how much you’ll need to pay upfront) to hit your target number.
What to look for in a good refinance lender
A good lender offers more than a low interest rate.
- Low refinance rates and closing costs
- Great customer service
- The right refinance product for you
Good customer service, a strong track record and delivering on any promises are all factors you should consider.
Also, make sure the lender offers the most beneficial refinance for your situation. If you have an FHA loan currently, don’t work with a lender that doesn’t offer the FHA Streamline Refinance, which requires no appraisal, no paystubs, and no W2s.
And check the lender’s reputation via online reviews, conversations with friends or neighbors or with real estate agents who work with more than one lender.
You can always start your search with your current lender. If you’re happy with the way they handled your original mortgage, you might not need to look far for a refinance.
Mortgage refinance rates FAQ
Are refinance rates different from purchase mortgage rates?
Typically, refinance rates and purchase mortgage rates are the same. You won’t pay a higher rate just because you’re trying to refinance your mortgage than you would if you’re using a mortgage to buy a home.
That said, your interest rate depends on a host of factors. For example, if you’re considering a cash-out refinance, you’ll likely pay a higher rate than you would if you’re refinancing just to lower your interest rate and monthly payment.
What refinance program has the best rates?
In many cases, loans backed by the VA and USDA provide the lowest refinance interest rates and limited paperwork requirements. However, you must be a veteran or live in a moderate-income rural area to qualify for a VA or USDA loan.
The FHA offers competitive refinance rates, especially if you’re refinancing from one FHA loan to another. The FHA Streamline Refinance Program is worth a look if you want a quick refinance with a competitive rate.
What affects my refinance rate?
Your credit score, debt-to-income ratio, and type of interest rate (fixed or adjustable) are a short list of factors that affect your refinance rate. Your loan term, loan amount, loan-to-value ratio and loan type (conventional, FHA, VA, USDA) also affect your refinance rate.
For example, you’ll pay a lower interest rate on a 15-year fixed-rate loan than you would for a 30-year fixed-rate loan. You’ll also pay a lower rate if you have a good credit score (typically 740 or higher) and a low debt-to-income ratio (typically 36 percent or lower).
How can I get a lower refinance rate?
The tried and true method for getting the lowest refinance rate possible is to get quotes from more than one lender — and ask questions. If you talk to a lender directly, ask why their rate or closing costs are different from other quotes you’ve received.
Ask lenders if they will provide you a loan estimate before you formally apply for a refinance so you can compare costs.
If you have a low debt-to-income ratio, a good credit score and a solid source of income, you’re in the driver’s seat. Lenders will fight each other to get your business.
What are mortgage refinance rates today?
Your rate depends on your current mortgage loan and your financial portfolio. To find the best refinance rate, compare loan estimates from a few different lenders. You can get started using the link below.