How to get the lowest 30-year mortgage rate for your refinance
Refinancing your home to capitalize on today’s lowest mortgage rates has been one of the hottest trends of 2020. Homeowners are refinancing at more than double the rate of last year, according to multiple sources.
Mortgage rates continue to fall to new highs, giving homeowners a strong incentive to refinance and save money. Rates fell to their 12th all-time low this year, in the long-running weekly survey by mortgage giant Freddie Mac.
According to a study released last week by mortgage data firm Black Knight, about 18.5 million Americans could refi and lower their interest rates enough to cut their monthly payments by an average of $ 304.
But borrowers must hurry to beat a new refinance fee, which officially takes effect in a few weeks. Here are four tips for getting the best deal when refinancing a new 30-year mortgage.
1. Gather mortgage offers and compare rates
Refinancing with another 30-year loan may be the right choice if your current mortgage is relatively young. You won’t increase your interest costs as much if you’ve only been in the house for a year or two.
Average rates slipped to an all-time high of 2.78%, Freddie Mac reported Thursday. And this is the average; some lenders offer 30-year loans at 2.5% or less.
Rates have fallen so much that you could be a great refi candidate if you took out a mortgage as recently as early 2020, while the average was around 3.75%.
But borrowers cannot assume that they will always receive the lowest possible rates. Different lenders can offer the same homeowner very different refinance rates, especially since some already factor in a new 0.5% commission on refi loans that officially begins on December 1.
To find your best refinance deal, you need to shop around and compare rates – don’t stop your search at the very first loan available to you. A study by Freddie Mac found if you get five quotes, you will pay a lifetime fee of $ 3000 on average less that if you end your research after hearing from just one lender.
2. Improve your credit score
Better credit scores lead to better mortgage rates. Lenders like borrowers with very good (740-799) or even exceptional (800-850) credit scores.
To get the type of refinance loan that will save you hundreds of dollars a month, you’ll need a score of at least 720, says Black Knight.
If you find that your credit score needs help, take the necessary steps to increase it:
Pay off your other debts, especially credit cards. A debt consolidation loan could help you get rid of credit card debt faster and at a much lower interest rate.
Don’t open new credit cards, but don’t close old ones either. If you do this, you will reduce your available credit, which could hurt your score.
Get a hold of your credit reports and make sure there aren’t any mistakes that could lower your credit score. A 2012 Federal Trade Commission study found that 20% of U.S. consumers had potentially costly errors on their credit reports.
3. Show a lender that you have invested in your home
Homeowners refinancing who have healthy amounts of equity in their homes tend to get the cheapest refinance rates.
Equity is the percentage of the value of your home that you own. To determine your equity, take the amount you’ve already paid for your home and divide it by the home’s current value. This number – which should be to the right of a decimal point – represents your equity percentage.
For a lender, the ideal refi candidate has at least 20% equity, says Black Knight. If you still have a way to go to hit the 20% level, you’ll want to make a down payment that will put you above the line.
As an added bonus, you won’t be required to buy or continue to pay for private mortgage insurance if you have at least 20% equity in your home.
Private mortgage insurance offers protection to the lender in the event of default by a borrower. It should not be confused with home insurance – which offers you protection if your home is damaged by fires, tornadoes and most other types of disasters.
You should already have home insurance – it’s vital, and most lenders need it. But every time your property policy is renewed, go online and get a bunch of rate quotes so you can be sure that you are not paying too much for your coverage.
4. Be prepared to pay “points”
Optional fees called “discount points” are a type of upfront payment that can help you get a low 30-year mortgage rate. One point is equal to 1% of your loan amount and can reduce your rate by a quarter of a percentage point, say from 3.2% to 2.95%.
Breathtaking mortgage rates often – but not always – come with points.
“By paying points, you pay more up front, but you receive a lower interest rate and therefore pay less over time,” says the US Consumer Financial Protection Bureau. “Points can be a good choice for someone who knows they will hold the loan for a long time.”
It will take time to break even points and other closing costs before you can really start enjoying the savings from your low mortgage rate.
The CFPB says lenders have their own individual pricing structures, so don’t assume that a point loan will always have the lowest rate. You might find another lender who offers a loan with zero points and a better rate.
This is another good reason to gather several loan offers and review them side by side – to make sure you’re getting the best mortgage rate for you.