Homeowners who want to refinance their mortgage naturally also want to find the lowest interest rates they can for their new loan. That’s because a lower refinance mortgage rate means a lower mortgage payment and potentially lower costs to refinance.
It’s not always easy to capture the lowest refinance mortgage rate, and not every borrower is offered the lowest rate that’s available. That’s why it’s helpful to understand the factors lenders use to determine which of the available rates they offer to borrowers.
Here’s a summary:
Credit score. Borrowers who have a high credit score typically are offered better refinance mortgage rates than borrowers who have a low credit score. That’s because the credit score, a numerical representation of the borrower’s credit report, reflects how well the borrower has handled credit in the past.
Points. Borrowers who pay points can buy down the interest rate of their new loan. Borrowers who choose to pay more points, based on the lender’s chart of various rate and point combinations, usually will be offered a lower rate. A “point” is equal to 1 percent of the loan amount.
Loan term. A 15-year mortgage usually has a lower interest rate than a comparable 30-year loan. That’s because the shorter term involves less risk to the lender.
Fixed or adjustable rate. Adjustable-rate mortgages, or ARMs, typically start out with a lower interest rate for the first few months or years than comparable loans with fixed rates. Borrowers should be aware, however, that the initial rate won’t last for the entire term. In some cases, it can rise and result in a sharply higher payment later on.
Loan amount. Home loans for large amounts of money, known as “jumbo” loans, may involve higher interest rates because lenders can’t as easily sell those loans to investors. Borrowers who stick with “conforming,” i.e., not jumbo, loans typically are offered lower rates.
Keeping these factors in mind can help borrowers qualify for the lowest refinance mortgage rates.