Refinancing your home loan involves applying for a new mortgage that will pay off your old mortgage with a new interest rate and term. There are many great reasons why people refinance their homes. It never hurts to shop around to see if there is a better rate than what you have. By applying for and comparing offers made by several different lenders, you will be better able to find the best mortgage refinance rates available.
Mortgage lenders may be able to offer you a competitive rate and a better term on your mortgage such as lower monthly payments or a reduction of the loan term to pay off the mortgage more quickly. And, it is very likely that you could qualify for a better rate and term than when you originated the loan if the current mortgage rates are lower, if you have made home improvements to increase your home’s value, if your credit has improved significantly, or if your debt-to-income ratio is better. If this sounds like your current situation, then you may qualify for a better rate and term and refinancing may be right for you!
The good news is that it only takes a few minutes to get an estimate of what you may qualify for. In order for you to get in on the best rates available, here’s how.
How to estimate your mortgage refinance rate?
Your mortgage refinance rate takes into account your financial situation. For that reason, for a better-estimated rate, it is worth cleaning up your credit, making sure your credit score is good and lowering your debt-to-income ratio before getting started.
When ready to estimate your mortgage refinance rate, you could start with a refinance calculator to see what your monthly payment might be. You will need to enter your answers in the home price, the down payment, the loan term, and APR or credit score, property taxes, homeowner’s insurance, and Home Owner Association (HOA) fees sections of the calculator in order to get an estimate that most suits your repayment needs. If your estimated new rate and term sounds good to you, it may be time to work with a mortgage lender to find out if they would offer something similar or even better.
How to shop around for the best mortgage refinance rates?
The next step is to apply through various mortgage lenders to see the actual rates being offered to you. You can start with your current lender first to see what they would offer. Then, you will want to be in contact with at least four or five different lenders to compare their rates and terms being offered. Getting quotes from multiple lenders ultimately helps you to find the best mortgage refinance rates possible.
Your list of four or five refinance lenders should include only reputable lenders that offer mortgages in your state, who offer the same type of loan that you currently have (e.g. FHA, USDA, etc.), and with whom you can do comparison shopping online with ease. The best companies will have easy-to-use websites where you can access refinance calculators and a convenient pre-approval process online. Next, contact each one to learn more about their services and to request an estimate.
And, once you have worked with each one to get the best mortgage refinance rates possible, you can do a side-by-side comparison. Some of the best companies you might consider comparing for refinancing include Better, Freedom Mortgage, Guaranteed Rate, U.S. Bank, Quicken Loans, AmeriSave Mortgage, and Wyndham Capital as well as traditional lenders like Bank of America and Chase. Each of these refinancing companies comes with its pros and cons.
If you refinance with Better, you are likely to get lower closing costs because they do not charge a loan origination fee, they require a 620 credit score, and they offer to refinance homes in all states. Better only offers conventional refinancing, however, and does not offer adjustable-rate, VA, FHA, or USDA mortgages. Freedom Mortgage is one of the biggest lenders in the nation for VA and FHA refinance loans, offers USDA and conventional loans as well, and is known for having some of the lowest refinance rates and lower costs and fees available.
Guaranteed Rate offers VA, FHA, and conventional refinancing options, has high customer satisfaction and very low refinance rates, but it has higher than average closing costs. Bank of America has a very high rate of consumer satisfaction with great customer service and offers conventional, VA, and FHA refinancing options but not USDA home loans.
Why refinance a mortgage?
While refinancing may not always be the right choice for everyone in all circumstances, there are many good reasons why people do choose to refinance their homes. People can use a refinancing of their mortgage to get a lower interest rate, to increase the monthly payment and shorten the term of the loan or to reduce the monthly payment and lengthen the life of the loan, to change from an adjustable-rate to a fixed-rate mortgage in order to lock in a lower rate longer term, to have a cash-out to pay for a major expense such as home improvement or a gap in income, to add on other debts into the loan for making one monthly payment, to include more than one home mortgage into one loan, etc.
If any of these reasons sound good to you, there is still a need to weigh the pros and cons of refinancing before deciding to refinance your mortgage. And, it never hurts to consult with a lender to learn more about the potential benefits and risks of refinancing before making a decision.
Are there any risks to consider before refinancing a mortgage?
Many lenders require a home refinance appraisal to determine its current value and to see if the value has changed since you originated your home loan. A house with increased value has improved its home equity and is eligible for better rates than those with decreased value and lower home equity. In some cases, if the home value is much lower, a lender may not approve refinancing as it would be too much of a risk for them to take.
If your lender does not require closing costs, then this will not apply. However, for those lenders that do, it will be a risk for you because you would be paying the closing costs again which you already paid when you originated the loan the first time and this includes fees such as the origination fee, title insurance, application fee, and closing fee. Luckily, if you shop around carefully, you can find a lender that does not charge many fees or costs at closing.
When requesting a mortgage pre-approval, it is important that you do not apply for other types of credit at the same time so that it will have less impact on your score. To apply for a specific type of credit such as a refinancing of your mortgage from various lenders, it is recommended to apply within a 14-day window of time so that they will all fall under one type of credit request and in this case, the inquiry will count as one inquiry and only lower your credit score by 5 points.
How does the term factor into the rate that is offered?
Generally speaking, different term lengths have different rates. For example, shorter-term mortgages come with lower rates. One way to get a better rate on refinancing is to shorten the term by paying it off more quickly, which will qualify you for much lower rates. Another option, though, is to choose a longer-term refinanced home loan with smaller monthly payments, if that works better for you; however, the rates that come with longer-term loans are higher.
How does your credit score factor into the rate that is offered?
Factors that lenders will look at when evaluating your mortgage refinance application include credit score, debt-to-income ratio, and home equity. In order to obtain the best mortgage refinance rates, you should work to improve each of these three key areas.
Your credit report is a record of your credit history and it is used by lenders to learn about you before deciding whether to offer a loan. Lenders use the credit score to determine if you have made regular on-time payments on your debts and if you are creditworthy. Credit scores range from 300 to 850. When refinancing your mortgage, borrowers with high credit scores will typically receive better lower rates, and those who have lower scores often get higher rates.
So, what credit score is needed to refinance a home loan? The answer depends on what type of loan you are applying for. Conventional refinancing requires a 620 to 720 credit score and depends on your debt-to-income ratio and your bank statement of cash on hand to determine if you qualify. FHA refinancing requires a 500 or 580 score. USDA refinancing does not require a minimum credit score but it does require proof of income in order to demonstrate the ability to take on and manage debt.
To work on improving your credit score, you can get a free credit report from all three major credit bureaus from annualcreditreport.com or by calling 1-877-322-8228. Once you get your credit report, look at it carefully to make sure everything is correct. If there is any error, you can report it by writing the creditor directly in a letter, turning in any record you may have that proves the amount is wrong, and try to get it fixed.
You can improve your credit score by paying down your balances on all debts, settling any late or overdue accounts, applying for a credit line increase on any existing credit card once you are eligible, or becoming an authorized user on a high-credit borrower’s credit card.
How does your debt-to-income ratio and home equity factor into the rate that is offered?
Regarding your debt-to-income ratio, what percentage of debt-to-income ratio can a borrower have and qualify for refinancing a mortgage? A debt-to-income ratio is the percentage of your gross income that is currently being used to pay for your debts each month. A debt-to-income ratio that is lower than 36% is more preferable by lenders and helps you to qualify for the best mortgage refinance rates available. Someone with a 43% debt-to-income ratio can still get qualified, but the rate offered will not be as good. For this reason, it is best to reduce your debts if and when you can in order to obtain the best mortgage refinance rates.
Working on building your home equity, the current market value of your home, is always worth doing as it will increase your chances of receiving the best mortgage refinance rates possible. For example, if you increase your home’s value after having originated your home loan by adding a new floor, a new wing, a new roof, or otherwise improving the home value in a major way, you can have it appraised at a higher value than before and this could significantly improve the refinance rate and term that a lender would offer.
What are the best mortgage refinance rates?
Mortgage rates can change day-to-day and what rate a person can obtain depends in large part on their financial situation which includes the credit score, debt-to-income ratio, and home equity. A person with a higher credit score, low debts, higher income, and home equity can obtain the best refinance mortgage rates available. To find the best refinance mortgage rates for you, be sure to start with a refinance calculator to estimate rates and then shop around and compare the offer of at least four or five different lenders with your current lender’s offer.
One thing to look for when choosing a lender is whether they offer lower rates and special deals such as no closing costs or fewer fees and costs, which could help you to save thousands of dollars over the life of the loan. The best mortgage refinance rates are lower than your current one and if you can pay more per month on your new mortgage, it will help you to save money on the overall price of your loan by shortening the term and lowering the overall price you will be paying on the mortgage.