Important points
Refinancing your mortgage makes sense if you can lower your 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 rates.
You can also consider purchasing discount points or paying your closing costs upfront to lower your interest rate.
Taking advantage of competing offers and seeking an interest rate match are also tactics to lower the cost of your loan.
Mortgage rates have fallen slightly from their peak in 2023, but are still below the historic lows of a few years ago. Still, if you took out a mortgage during the past few years of rising interest rates, it may make sense to refinance if rates fall further.
Ideally, homeowners should consider refinancing if they can reduce their mortgage by 0.5% to three-quarters of a percentage point, said Greg McBride, CFA, chief financial analyst at Bankrate. After all, the main purpose of a refi is to lower your monthly mortgage payment and reduce the interest you pay over the life of your loan. So here are some strategies to help you get the best refinance rate.
How to get the best refinance rate
Each of these steps can lead to a refinance rate that lowers your monthly payments. Please note that approval and actual interest rate offers also depend on your home, location, and current mortgage rate trends.
- improve credit score
- Compare refinance interest rates
- Buy points to lower your rate
- Decide which loan term is best for you
- Choose a fixed interest rate
- Consider the loan amount
- prepay closing costs
1. Improve your credit score
Other than fixing mistakes on your credit report, “there aren’t many ways to improve your credit score right away,” says Senior Director of Partner Relations at Sugar Land, Texas-based nonprofit Fixed Income Money Management International. says Jackie Boys. Counseling agency. “Taking the time to apply good credit habits is the way to improve your score.”
These good credit practices include making payments on time, paying off large credit card balances, and applying for new credit judiciously.
Carrying credit card debt can only be costly. Bankrate’s Credit Utilization Survey found that 37% of cardholders have maxed out their credit card limit or are nearing it since the Fed began raising interest rates.
2. Compare refinance interest rates
When you’re looking to refinance and save money, compare as many mortgage offers as possible. Even small differences can save you thousands.
When comparing interest rates, also consider the annual percentage rate (annual percentage rate). This includes annual fees and gives you a more accurate picture of your true costs. You may find that the mortgage refinancer with the lowest advertised interest rates has higher fees and closing costs and actually has a higher APR on your loan than its competitors.
Not sure where to start? Bankrate’s online calculator makes it easy to compare current refinance rates in one place, enter your desired terms and fees for a specific loan, and calculate how much it will cost to refinance. You can check.
3. Buy points to lower your interest rate
Mortgage points allow you to pay your lender upfront for a lower interest rate over the life of your loan. 1 point is equivalent to 1% of the loan amount.
Bruce McCrary, a spokesperson for the National Credit Counseling Foundation, a Washington, D.C.-based nonprofit, said homeowners should negotiate loan terms whenever possible to secure the most favorable interest rates and terms. It states that there is. He added that borrowers with healthy credit scores have more bargaining power than those with average or low scores.
It’s also important to get multiple quotes. Bankrate’s McBride says lenders offer a variety of programs, “from no-points and high interest rates that you have to pay out-of-pocket to those that permanently buy down the interest rate and require more points upfront.” stated that it provides. Of course, homeowners should avoid using up their savings just to get a lower interest rate. McBride advises only buying points “if you have the cash and plan to take out the loan long enough to take advantage of the low interest rates.”
4. Determine the optimal loan term
Shorter loans, such as 10-year and 15-year fixed rates, have lower interest rates than longer loans, but at the cost of much higher payments. This can be a problem in the event of unemployment.
“Homeowners shouldn’t be forced to pay high prices that limit their flexibility just to save a half-percentage point,” McBride says. “Maintaining financial flexibility is important.”
Longer mortgage terms can keep your monthly payments lower, but the cost of repaying your loan will be higher because you’ll pay more interest over time, McCrary says.
In addition to regular monthly payments, homeownership can come with unexpected costs. According to our Homeowner Regret Survey, 40% of homeowners who regret their home purchase cite higher-than-expected maintenance and other hidden costs as a reason for their regret. When choosing a loan term, keep the big picture of housing affordability in mind.
5. Choose a fixed interest rate
Many homeowners choose a 15-year or 30-year loan when refinancing, but they still need to decide between a fixed or adjustable rate. If there is little difference between a fixed rate and the initial interest rate on an adjustable mortgage, the value for homeowners lies in the fixed rate, McBride said.
“Make permanent payments affordable on fixed-rate loans,” says McBride. Fixed prices also help consumers budget more easily.
If you plan to live in your home for a long time, McCrary says it makes sense to get a fixed-rate loan. “If interest rates are likely to fall in the near future, or if the property is likely to be sold before the loan is repaid, a variable rate loan may be the way to go.”
With an adjustable-rate or adjustable-rate mortgage (ARM), the interest rate changes at specified intervals based on the market and a margin determined by the lender. Therefore, while interest rates may fall at such times, they may also rise significantly. As a result, fixed-rate loans are generally less risky and easier to qualify for than ARMs..
6. Consider the loan amount
The more you borrow on your home loan, the higher your monthly repayments will be. Boyes said a homeowner who takes out a 30-year mortgage on a $250,000 home with a 4% interest rate and a 10% down payment would pay $1,195 a month, which drops to $955 if the down payment is 20%.
“You will want to consider the long-term savings over the life of the loan,” he added.
It can be confusing when presented with all the options for refinancing your mortgage, but there are many resources to help. “HUD-accredited nonprofit agencies affiliated with the National Credit Counseling Foundation can provide you with professional advice and direction to help you make the right decisions,” McCrary says.
Borrowers also need to fully understand the terms of their mortgage. Boyes says to use online calculators to help you make decisions and find the mortgage that best suits your needs.
7. Pay closing costs upfront
The closing costs you pay vary depending on the lender, loan amount, and location, but typically range from 2% to 5% of the new loan amount. So if you want to refinance a $400,000 mortgage, you’ll typically pay between $8,000 and $20,000 in closing costs. These costs may be negotiable to some extent.
Some lenders offer to roll closing costs into your loan, but there’s a catch. To secure a refinance loan with no closing costs, you may have to pay a higher interest rate, which could result in higher mortgage payments. Additionally, you will pay more interest to your lender because you will be paying interest on these closing costs over the life of your loan.
For example, a lender may offer to refinance your $400,000 mortgage with a 30-year term at 6% per annum and charge $13,000 in closing costs. Alternatively, you can refinance for the same loan term at 6.5% APR with no closing costs.
If you choose to refinance at a lower rate, you’ll pay $1,919 per month in principal and interest, and $370,682 in interest over the life of the loan. However, if you choose zero closing costs, your monthly mortgage payment would increase to $2,023, for a total of $407,182 in interest.
FAQs for getting the best refinance rates
conclusion
You can get the best refinance rates by cleaning up your credit before you start your application and prepaying your closing costs after you get your loan.
But the important thing is to look around. Taking the first refinance offer you come across is rarely the best idea. Bankrate’s refinance rate table gives you the opportunity to compare rates, understand trends, and shop for a mortgage refinance online before you formally apply with a lender. So if you find a good deal, you can strike while the iron is hot.
