30-year mortgage rates have tumbled to historic all-time lows have and even slipped below 3%, homeowners are rushing to refinance to shrink their monthly house payments.
It’s a good defensive move for households whose finances that have taken a hit from the coronavirus outbreak and ensuing Wall Street fallout. In an unusual benefit from the pandemic, the rollercoaster chaos on the financial markets has helped to push mortgage rates down to “bargain basement” levels.
If you’re determined to refinance in an effort to save money, how do you score a rate that’s supremely low, instead of — well, just kind of low?
Here are six tips for getting the best mortgage refinance rate you possibly can.
1. Be a good refinance candidate
Will a mortgage refinance really save you money? Some experts say a good measure is whether you currently have a 30-year fixed-rate mortgage with a rate higher than 4% — and many people do. A year ago, the typical rate was around 4.1%.
Rates recently hit an average 3.23%, an all-time low in the nearly 50-year-old weekly survey from mortgage company Freddie Mac. Other, daily surveys put average rates on 30-year conventional mortgages closer to 3%, and show that FHA and VA loans are already averaging under 3%.
The best rates go to borrowers whose credit scores are exceptional (800 or above) or very good (740 to 799), but note that some lenders have been tightening their credit score standards amid the current crisis. If you don’t know your credit score, you can easily take a look at it for free.
When you apply for your refinance loan, you’ll need to show that you’re earning income — which might be a challenge right now. If you, the borrower is furloughed or laid off during the application process, unless you can still qualify using other types of income, your file will definitely be denied.
2. Shop around to find your best rate
To get the best deal on your refinance, you’ll want to compare rates from several lenders, not just settle on the very first loan you see.
Homeowners who comparison-shop for their mortgage refinance loans save an average of around $163 a month, or $1,953 a year, versus those who don’t, a recent Lending Tree study found. And the savings can be really jaw dropping especially in higher-priced markets. For example, borrowers in San Francisco who don’t shop around pay an average of more than $66,000 in extra interest charges over the life of a mortgage. In Boston, you’ll pay about $59,000 more, according to the study.
3. Prepare to pay closing costs
To land the lowest mortgage rate you can get, you’ll want to pay your loan’s closing costs upfront. Typically, you’ll be charged fees equal to 2% to 5% of your loan amount. Including taxes, the average for U.S. closing costs is $5,749, according to the latest estimate according to the real estate data firm Closing Corp.
If you took out your mortgage early in 2019, a refinance today will save you $60 a month for every $100,000 you borrow, Lending Tree chief economist Tendayi Kapfidze said recently. So, you might easily earn back your closing costs if you plan to stay in the home at least a few more years.
It’s critical that you speak with a professional who can help you to determine if the benefits of refinancing outweigh the costs. If you don’t have the cash to pay closing costs upfront, you have the option of doing what’s called a no-closing-cost mortgage and have your lender cover some of the fees for you. But, you’ll have to accept a higher interest rate in lieu of this closing fee.
4. Prepare to act fast
The coronavirus crisis has made financial markets volatile, and mortgage rates have gone through some gyrations, too. The effect on mortgages mean that rates can change daily. Loan packages can get sent out and by the time they get returned, the rate may no longer be available. It is extremely important to be able to move quickly in this environment when locking a mortgage refinance rate.
That means working diligently ahead of time to gather up all of the usual, necessary documentation — including pay stubs, bank statements and tax returns — and having that stuff ready to present to a lender. And make sure that your lender or broker has the ability to send paperwork to you electronically, so you can sign everything immediately and get your rate locked immediately.
5. Have realistic expectations
People in the mortgage industry say some homeowners who’ve heard that the Federal Reserve has cut interest rates down close to zero mistakenly think that they can get mortgages at 0%. Sorry, but no. While mortgage rates are at some of the best levels ever seen, they’re not at 0%.
This is how it works, the Fed’s policies don’t have a direct impact on long-term, fixed mortgage rates, but on short-term and variable-rate loan products, such as credit cards and home equity lines or credit (HELOCs). And the rates on those don’t match the Fed’s benchmark rate either. Instead, they’re tied to the prime rate, which is set by banks and moves up and down in sync with the Fed’s federal funds rate.
6. Be willing to pay ‘points’
Finally, here’s one more piece of advice to help you snare the lowest rate out there: when you take out your loan, consider paying “discount points,” which are fees amounting to a percentage of your mortgage loan amount. Paying points reduces your mortgage rate, and it’s a strategy that has become even more effective. Instead of lowering a rate by 0.25 of a percentage point when paying one point [1% of your loan amount], maybe it will lower the rate even more.
When you pay points, you “buy down” your mortgage rate — which also will lower your monthly mortgage payment.
Contact one of our loan consultants to learn more about this program.