It is still a good time to look for the best refinance rates that will save you money on your mortgage. Most experts agree that interest rates have nowhere to go but up, especially as the Federal Reserve considers its first rate hike in years. But where do you find the best rates, and insure that you don’t miss the boat? Below, I’ll share some strategies that will help you find the best refinance rates on your mortgage.
To nab the best mortgage refinance rates, one of your first moves should be to shop around online and get a sense for the best rates in your area. You can use the tool below to get a feel for what you might pay.
Why Should I Refinance My Mortgage?
It’s common for people to transfer their balance from a credit card with a high interest rate to one with a lower interest rate, resulting in a more manageable monthly payment and a bit more breathing room in their budget. Refinancing your mortgage at a lower rate can allow for the same thing on a bigger scale. You may also want to refinance to obtain a shorter loan term or a different type of mortgage.
Whatever your reason, refinancing can save you money in the short term, the long term, or sometimes both.
Current Rate Climate
According to Bankrate, a 30-year fixed-rate mortgage had an average interest rate of 4.01% in early December 2015. A 15-year fixed rate loan averaged 3.25%. Rates have actually been sliding a bit in the past few weeks because of weaker-than-expected pending home sales.
Where will rates go in 2016? No one can say for sure, but experts with the Mortgage Bankers Association are predicting rates of around 5% by the end of next year. Fannie Mae’s economists foresee a much gentler rise to just 4.2%.
Throw in the possibility of a Fed rate hike, and the question seems to have shifted from whether rates will rise or fall to how much they’ll rise — slightly, or more substantially?
How to Get the Best Refinance Rates
There’s little magic involved in getting the best mortgage refinance rates. Like most other financial decisions, you’ll need to do a little research and some comparison shopping. If your finances aren’t in top shape, you may also need to put in some hard work to raise your credit score and reduce your debt load before refinancing.
Step 1: Do the math first
Before you shop for mortgage refinance rates, play with the numbers using a refinance calculator. Selecting a shorter mortgage term can lower your interest rate, saving you much more in the long run and getting you out of debt faster — but it will also boost your monthly payment. You’ll want to decide what you can comfortably afford before a lender tries to make that decision for you.
Let’s say I originally obtained a conventional 30-year, $200,000 mortgage five years ago at an APR of 4.75%. Here’s what the numbers could look like according to new loan terms and average refinance rates (keeping in mind that shorter loan terms usually come with lower APRs):
|New term and APR||Change in monthly payment||Amount saved over life of loan|
|30 years, 4.04%||$165 less||None; will pay $6,834 more|
|25 years, 3.98%||$79 less||$20,046|
|20 years, 3.87%||$53 more||$46,206|
|15 years, 3.19%||$238 more||$78,666|
If getting the lowest interest rate is my top priority, that 15-year term looks pretty sweet — and so does saving more than $78,000 in interest over the long run. But I’ll need to cough up an extra $238 a month.
Step 2: Make sure your credit is in top shape
Your credit score will affect the interest rate you receive just as much as it did when you obtained your original loan. For that reason, refinancing will often provide the greatest benefit for anyone who has seen their credit score climb since getting their mortgage.
Wondering how much your credit score can affect your refinance rates? According to myFICO, someone refinancing a conventional 30-year, $200,000 loan with excellent credit would receive an average APR of 3.69% as of January 2016. Meanwhile, someone with only fair credit would see an average rate of 5.28%. The excellent-credit borrower would pay almost $200 less per month. Here’s a more detailed breakdown:
|Credit score||APR||Monthly payment|
If your score is lower than 620, you’ll have a tough time refinancing with most traditional lenders. Credit unions and local banks may offer a bit more wiggle room than bigger banks, but your chances of approval will be much better (and your APR much lower) if you take time to focus on raising your credit score first.
Step 3: Chip away at your debt
Your credit score isn’t the only thing helping to determine your interest rate. Lenders also want to make sure you aren’t burdened by too much debt — after all, if you can’t keep up with your credit card payments, your mortgage could be next.
The number they’ll look at is your debt-to-income ratio, or DTI, which is simply the percentage of your gross income that your debt payments will eat up — those include student loans, car payments, and minimum payments on your credit card balances, as well as your potential mortgage. Someone earning $4,000 a month with total debt obligations of $1,000 a month has a DTI of 25%.
DTI requirements vary by lender, but most will want to see a maximum of around 43% DTI — and lower is better. So if you have a monthly gross income of $6,000 a month, you would want to make sure no more than $2,600 is being used to pay off debt.
If your DTI isn’t looking so hot, it may be time to form a game plan to help you reduce your debt load. Simple debt-reduction strategies like paying more than the minimum every month can ultimately reduce your DTI and put you in a better position to refinance mortgage rates.
- Related: 11 Ways to Get Out of Debt Faster
Step 4: See if Uncle Sam will help
The government-backed Making Home Affordable initiative offers a couple of lower-cost refinancing options for homeowners who have little equity in their homes or are underwater with their mortgages. Both of the programs below currently have application deadlines of Dec. 31, 2016.
The Home Affordable Refinance Program, or HARP, might be an option for struggling homeowners with a Fannie Mae or Freddie Mac loan. You’ll need to be current on the loan, which you had to originate before May 31, 2009. You’ll also need to show a loan-to-value ratio of greater than 80% to qualify.
With the FHA Short Refinance Program, your lender knocks at least 10% off your unpaid mortgage principal. To qualify, you must owe more on your mortgage than your home is worth and have a credit score of at least 500. You must also be current on the loan, which cannot be an FHA-backed mortgage.
If you do have an FHA loan, you might be eligible for the FHA Streamline Refinance, which doesn’t require a new home appraisal for you to obtain a lower interest rate. For that reason, the program can be enormously beneficial for those with homes that have dropped in value.
Step 5: Don’t forget about closing costs and fees
Whether you’re buying or refinancing, there’s nothing cheap about getting a mortgage. There are application fees, home appraisal fees, attorney’s fees, survey fees, title searches — the list of things you may pay for to refinance is long, and will probably cost at least a few thousand dollars by the time it’s said and done.
Because closing costs and fees are not exactly insignificant (they average about $2,000 to $3,000, depending on the state you live in) be sure to decide whether it makes the most sense to pay cash at closing or add them to your loan. The former is ideal for anyone who wants to pay the least long term, while rolling them into the loan might be the better option for someone who doesn’t want to dip into savings.
Another option is a “zero closing cost” mortgage, where you may pay a slightly higher interest rate in exchange for your lender ponying up at closing. Again, this makes the most sense for someone who doesn’t have the cash on hand for closing costs or who might not stay in their new home long enough to recoup those costs and start benefiting from lower home refinance rates. If you’re aiming to stay in your home long term, you’ll probably pay more going this route.
Step 6: Shop around
Remember, you’ve got a lot of options when it comes to refinancing: mega banks, community banks, credit unions, and even non-bank entities like big home builders among them. All are direct lenders that will decide whether to approve your application and fork over the money.
You can also work with a mortgage broker that can help you look around and decide which lender is best for you. That could translate into a better rate, but you’ll want to beware of any hidden costs or fees for this service.
Whatever you decide, make sure you look at rates online to get a baseline for comparison. And don’t discount other important factors such as customer service in your rush for the the best mortgage refinance rates. You can check out J.D. Power’s Primary Mortgage Servicer Satisfaction Ratings for an unbiased look at several major lenders. It also helps to ask family and friends about their experiences if they’ve recently bought or refinanced a home.
Go Online to Find the Best Refinance Rates
Be sure to begin your search with an online quote tool like the one at the top of this article, which can give you a good starting point for investigating rates in your area. Want to learn more about refinancing? Here are some of The Simple Dollar’s past articles on the topic: