When mortgage rates are low, you can cut your monthly house payment by refinancing into a better interest rate.
If you can shave at least one-half of 1 percentage point off your current mortgage rate, it can be worth your while to trade in your existing home loan for a new one.
Here’s how to get the best refinance rate:
- Polish your credit.
- Consider a shorter loan term.
- Shop local, then widen your net.
- Know when to pounce.
1. Polish your credit
Make sure you’re paying your bills on time — especially your mortgage — in the months before you apply for your refi loan, so you’ll have the strongest possible credit score. The better your score, the lower your interest rate.
Don’t open or close any other credit accounts during this time, because that could lower your credit score.
Get your free annual credit reports from the three major credit bureaus (Equifax, Experian and TransUnion) to be certain there are no errors or old debts on your credit record that don’t belong there. Those can weigh down your credit score. Bankrate offers a free credit report and credit score as well.
Paying off bigger chunks of credit card or other debt will help boost your score.
Lenders typically prefer that your total debt add up to less than 43 percent of your annual income. If you can reduce that debt-to-income ratio, you can land a lower interest rate.
2. Consider a shorter loan term
If you have a 30-year mortgage that you’ve had for several years and refinance into another 30-year loan, you’ll drag out your mortgage debt and interest rate payments over a longer period — unless you sell the house before the end of your term.
You could choose a shorter-term refinance, such as a 15- or 20-year mortgage, and enjoy a lower interest rate.
Throughout 2018, rates on 15-year fixed-rate mortgages have been about 60 basis points (0.6 of 1 percentage point) lower than rates on 30-year fixed-rate loans, according to Bankrate’s weekly survey.
But note that a shorter-term loan will come with a higher monthly payment.
You also might consider refinancing a fixed-rate loan into an adjustable-rate mortgage, or ARM. Those tend to come with lower interest rates, at least during the initial years before the rate starts “adjusting.”
However, if you think you may be staying in the home for the long haul, an ARM likely isn’t the right choice, especially in the current rising interest rate environment.
3. Shop local, then widen your net
Gather rate quotes, starting with the lender holding your current mortgage. That financial institution has an interest in keeping your business, so it might offer you an attractive refi rate.
Next, search lenders in your area, including smaller banks and credit unions. Sometimes, a lender that’s trying to expand in your market will offer a good deal on your rate, to win you over as a customer.
Expand your comparison-shopping to the largest lenders, plus online lenders.
Also, check lenders specializing in the type of property you own. Some lenders specialize in high-rise condos or beach communities and might offer you a better rate because they are more comfortable with your property.
Ask lenders about fees and closing costs, so you can determine whether your refi will really save you money.
“If all you ask is ‘What’s your rate?’ then chances are the mortgage banker will help you with one situation but may not get what’s best for you,” says Bill Banfield, an executive vice president at Quicken Loans.
4. Know when to pounce
Mortgage rates can fluctuate, so you have to get the timing right and know when to lock.
Rates on 30-year mortgages tend to follow the yield on the 10-year Treasury bond and are influenced by actions taken by the Federal Reserve to raise — or lower — rates. Work with a loan officer who understands how rates are behaving and can help you pounce after a news event has pushed rates down.
“When finding a lender, the three things most important things are: having trust, a commitment to service and communication,” says Kerry Wirth, chief operating officer of Waterstone Mortgage.
It appears the Fed is getting ready for more rate hikes, so you may want to make your move quickly — to beat the increase.