Refinancing when mortgage rates fall, something that’s been happening throughout the first quarter of 2020, allows homeowners to save on their monthly payments with a lower interest rate than their current loan.
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.
Refinancing from a 30-year or adjustable rate mortgage to a lower fixed rate can help consumers pay less money each month and cut the total amount of interest paid on the loan.
Here are some ways that will help you get the best mortgage refinance rate:
1. Improve your credit score
While there are no quick fixes to improving your credit score aside from correcting any errors made to your credit report, paying down a large credit card balance with a lump sum can “provide a quick boost” by reducing your debt-to-available credit ratio, he says.
The largest component of a credit score is whether you pay your bills on time, so being consistent in this area is critical, McBride says.
The other factors used to calculate your credit score include the amount owed, length of credit history, new credit and types of credit used. Avoid using over 30 percent of your available credit on a credit card and don’t close the old accounts that you paid off because it lowers your amount of overall available credit.
“There aren’t many ways to quickly improve your credit score,” says Jackie Boies, a senior director of housing and bankruptcy services 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.”
2. Buy points to lower your interest rate
Homeowners can buy points to lower their interest rate. In other words, you pay the lender up front 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 organization, says homeowners should negotiate the terms of the loan where they can. In addition, meeting all of the mortgage approval guidelines helps avoid having to pay more for what you borrow. This includes interest and prepaid points.
“Those with healthier credit scores have more negotiating power than those with average or low scores,” he says.
Getting more than one quote is also important. Lenders offer a variety of programs, ranging from “no points and out-of-pocket costs with a higher rate to those requiring more points up front by permanently buying down the rate,” McBride says.
Homeowners short on cash should avoid depleting their reserves just to buy down the rate, however.
“Only do so if you can spare the cash and plan to be in the loan for a long enough time to reap the benefit of the lower rate,” he says.
3. 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 such as a 30-year fixed, 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.
4. Go for the fixed interest rate
The value for homeowners is in fixed rates since 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,” he says. A fixed rate can also help consumers budget more easily.
When rates are already fairly low, but could possibly increase in the foreseeable future, it makes sense to get a fixed-rate loan, McClary says.
“This is also true for those who plan to remain in their home for longer periods of time,” he 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.”
5. Watch that 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,” she says.
While it is easy to get confused when presented with all of the options for refinancing a mortgage, there are many resources available for help.
“A HUD approved non-profit 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. Utilize online calculators to help make decisions and find a mortgage that best suits your needs, Boies says.