NOTE: Due to the coronavirus outbreak, refinancing can be a bit of a challenge. Lenders face high demand for loans and staffing challenges. If you can’t pay your current home loan, check out our mortgage aid Resource. For the latest information on how to cope with financial stress during this emergency, see NerdWallet’s COVID-19 financial guide.
With mortgage rates at their lowest in 50 years, you’ve decided to try and get the absolute best refinance rate of a lifetime. If you want to score a rate for the record books, here are nine things you’ll want to do.
1. Check your credit report for errors
Credit report mistakes happen more often than you might imagine, says Mary Anne Daly, senior loan advisor for CrossCountry Mortgage in Larkspur, Calif.
“I got credit for someone who had a state tax lien and a deduction,” Daly says. “They said, ‘It’s not mine. I don’t know anything about it.'”
She also remembers clients who had a credit score of 623. Their credit reports had errors and clients wondered if an improvement in their score was worth fixing. By erasing errors from their history, their credit score improved to 660 and borrowers saved $ 95 per month on their home loan.
2. Keep your credit card balance below 25% of your available credit.
Daly says to consider asking your credit card providers to increase your available credit. Using a smaller percentage of your available credit reduces your credit utilization ratio and can earn you a better interest rate.
3. Don’t stop using consumer credit
Paying off consumer credit can be liberating, but you should continue to make small purchases with your credit cards every now and then. Even if you pay off the balance every month, it shows that you are managing debt responsibly, which can actually improve your credit score, Daly adds.
4. Beware of “no-fee” loans
“It always tickles me,” Daly says of that loan stuff. “There are no free lunches.” All lenders will charge a fee, whether prepaid, built into the loan balance, or built into the loan interest rate.
It is not uncommon for closing costs to be tied to a loan. Joe Burke, senior vice president of secured rate mortgages in Chicago, says pay refinance closing costs out of pocket can lower your interest rate.
5. Consider a shorter loan term
Burke notes that extending the term of your loan may not be in your best interests.
“If you’ve already paid for seven years in a 30-year plan, for example, putting yourself in a new 30-year plan might not be the best financial decision,” he says.
Going from a 30-year mortgage to a 20-year or even 15-year term can earn you a lower mortgage interest rate, not to mention reduced interest payments over the life of the loan.
“Switching to a 20-year or even 15-year term can lower the interest rate on your mortgage and lower interest payments over the life of the loan.“
“A lot of people don’t know that,” Daly adds. She talks about clients who were considering several options on a mortgage. They had 10 years left on their loan and they thought it wouldn’t make sense to refinance. Daly showed them that refinancing to a 10-year loan term with a lower mortgage rate would save $ 45,000 in interest, without significantly affecting their monthly payments.
“They were just thrilled,” says Daly, “paying a little more [each month] but saving all that money. “
6. Resist the urge to withdraw cash
A cash refinancing allows you to take part of the equity in your home as part of a new loan. But it also increases your ready to value report. This will increase your interest rate in most cases, says Daly.
7. Lock in your best refinance rate
“Sometimes, believe it or not, we have a little crystal ball” on how mortgage rates can behave in the very short term, says Daly. This can be related to major economic news, political announcements, or government reports.
After discussing the estimated time of closing with your loan advisor, find out about a mortgage rate foreclosure, which will prevent rising rates from affecting your mortgage while the loan is being processed – which can take weeks.
8. Think about how long you will be living in the house.
“One of the questions we always ask people is, ‘How long do you plan to stay home? Burke says. “I think that’s a very important question that a lot of people don’t ask.”
For example, if you know you’re going to sell your home in five to ten years, an adjustable rate mortgage, with a lower introductory rate than a fixed rate loan, may be the right choice, adds Daly.
9. Buy the rates – and know what they mean
Buying more than one lender can be the most effective way to get the best refinance rates. According to a study by Freddie Mac, a government-sponsored entity that helps fund the mortgage market, getting just one additional rate quote could save borrowers an average of $ 1,500 over the life of a loan.
Buying five lenders could save you about $ 3,000, says Freddie Mac.
“Advertised rates that appear unusually low may include discount points, which you will need to pay up front.“
But advertised rates that appear abnormally low may have reduction points integrated – this is when you pay up front for a lower interest rate. For the lender, factoring in discount points can be a ploy to boost business, but for borrowers, points can be part of a lending strategy.
“Most of the time, we find that the buyout doesn’t make sense,” Daly says. To see if discount points work for you, compare your monthly savings to the time it will take to recoup the fees – and how long you plan to stay in a home.
Burke says borrowers often set a low rate but miss important details about the loan terms disclosed in the fine print.
“Looking at APR is absolutely one of the best ways to go about it,” he says. The declared annual percentage rate of a loan includes the interest rate you will pay on the loan, plus any fees. You will need to complete an application with each lender you are considering to get all of the information that has an impact on your offered APR.