How to Get the Best Mortgage Refinance Rates

In this article

1. Here are Some of the Best Ways to Get the Best Refinance Rates:
2. 1. Check Your Credit Report for Errors
3. 2. Boost Your Credit Score
4. 3. Reduce your Credit Utilization Ratio
5. 4. Cut Down on Your Monthly Debt
6. 5. Save Up to Pay Closing Costs Upfront
7. 6. Find the Best Refinance Rates by Comparing Multiple Lenders
8. 7. Set a Limit on the Loan Amount
9. 8. Get a Fixed Rate to Enjoy Stable Savings
10. 9. Choose a Shorter Loan Term
11. 10. Lower Your Interest by Buying Mortgage points
12. 11. Lock in the Best Refinance Rate

If you want to get a great refinance rate on your mortgage, you need to get multiple quotes, build your credit score, and consider shortening the term.

If there’s a fall in mortgage rates, homeowners may start to crunch the numbers to find out whether it makes sense for them to refinance. If you can secure a new mortgage with a lower rate of interest, you could potentially save money in the long run by refinancing. Fortunately, there are many things that you can do to make this happen.

Here are Some of the Best Ways to Get the Best Refinance Rates:

• Boost your credit score
• Check for errors on your credit report
• Get a fixed rate for stable savings
• Compare multiple lenders to discover the best refinance rates
• Save up to pay closing costs upfront
• Cut down on your monthly debt
• Opt for a shorter loan term
• Reduce your utilization of credit
• Buy mortgage points to lower your interest
• Set a limit on the loan amount
• Lock in the best refinance rate

1. Check Your Credit Report for Errors

It is generally advisable to find out what is in your credit reports before you apply for a mortgage refinance. A study commissioned by the FTC showed that up to 25 percent of consumers had errors on their credit reports that are likely to affect their credit scores and some of the errors may result in loan terms that are less than favorable.

To check your credit reports, visit AnnualCreditReport.com to get a free copy from each of the credit bureaus once a year.
Don’t forget to scan the credit report for:

• Duplications, such as one account listed twice
• Incorrect details, such as closed accounts that are reported as open
• Indications of identity theft e.g., accounts that you do not recognize

2. Boost Your Credit Score

The vast majority of lenders will pull your credit report during the refinance process, so it can be a good idea to check your credit score to find out whether it needs work. Most of the loans generally require a score around 620, but a score of 740 or higher will likely result in far more competitive rates.

Below is a quick look at how credit score impacts the interest rate and long-term loan costs:

Note: All the figures here are for demonstrative purposes only and don’t actually represent an advertisement for the available terms. The example above is based on a $200,000, 30-year loan and the interest rates as of January 13th 2022.

If you’re looking to improve your credit score, follow these tips:

• Pay your bills in a timely fashion. Setting up reminders or automatic payments can help with this.
• Pay down some or all of your debt. If you would like to increase your income, you should consider getting a side hustle.
• Avoid closing any credit cards since this will help you maintain a long credit history.
• Avoid hard inquiries. It is generally advisable not to apply for any credit before you refinance a home. Applying for a new credit will likely generate a hard inquiry, which in turn may affect your credit score.

Comparing your refinance rates will not impact your credit score. You can actually compare several different refinance and closing cost options right here. It takes less than 30 seconds to see what your options are.

Find out whether refinancing is the best option for you:

• Genuine rates from different lenders: Get genuine pre qualified rates from different lenders without impacting your credit score in 3 minutes.
• Smart technology: The questions you are required to answer are streamlined and the document upload process is automated.
• End-to-end experience: You can complete the entire origination process from rate comparison to closing on one platform.

3. Reduce your Credit Utilization Ratio

The credit utilization ratio measures how much credit you are using compared to the amount of credit that you have available. Your refinance rates may be lower if you can lower the credit utilization ratio prior to applying for the refinance loan. A decent target ratio to aim for is 30 percent or less.

For example: Let’s say you have a credit with a balance of $900 and a credit limit of $3,000 To calculate the credit utilization, divide the balance by the credit limit:

$900 / $3,000 = 0.27 or 27%

You can lower your credit utilization naturally by paying down your debt. Still, you can ask your card issuer to increase your credit limit, which helps lower the credit utilization ratio too.

4. Cut Down on Your Monthly Debt

The other key factor your lender might consider during the refinance process is your debt-to-income (DTI) ratio. It is expressed as a percentage and measures how much of your income goes towards debt payments each month. A lower DTI will help you qualify for a great refinance rate or make up for a credit score that’s less than favorable.

2 types of DTI are calculated by mortgage lenders. The front-end DTI ratio includes just the housing costs. The back-end DTI ratio, on the other hand, includes all debts.

For example: Let’s say that you are considering a mortgage payment of $1,200. Your gross income is $5,000 and you have a $250 car payment as well as a $300 student loan payment. Here is how the DTI should be calculated:

– Back-End Ratio ($1,200 + $300 + $250) / $5,000 = 0.35 or 35 percent

– Front-End Ratio: $1,200 / $1,500 = 0.24 or 24 percent

A DTI of 43 percent is usually required by the vast majority of lenders, which means that having a DTI under 36 percent can help you get a better rate.

5. Save Up to Pay Closing Costs Upfront

You should consider saving up for the closing costs before you refinance. These usually reach $5,000 on average and may include:

• Lender Origination Fees
• Credit Report Fees
• Underwriting Fees
• Attorney Fees
• Survey Fees
• Tax Service Fees
• Title Services
• Appraisal Fees
• Government Recording Costs

Lenders sometimes offer loans known as no-closing-cost refinances that can help you save this upfront charge. However, they will typically bundle closing costs into the loan or make up for it with a higher rate of interest, so you will need to check whether you will still come out ahead in the deal. 

6. Find the Best Refinance Rates by Comparing Multiple Lenders

Different lenders have different ways of setting interest rates, which is why it is so important for you to shop around. It is estimated that borrowers save an average of $3,000 over the life of their mortgage by getting 5 rate quotes.

When comparing offers, ensure that you not only compare the interest rate but also the annual percentage rate (APR) with each lender. The APR is a superior indicator of the loan’s total cost since it includes the interest rate as well as any fees charged by the lender.

7. Set a Limit on the Loan Amount

With some refinance loans, cash-out refinances included, you can actually take out a loan higher than the current mortgage balance and pocket the difference. Unfortunately, this often leads to a higher interest rate since you are increasing the loan-to-value ratio (LTV).

The LTV measures the amount of equity you have in the home compared to your mortgage balance. To calculate the LTV ratio, divide your mortgage balance by the market value of your home, and then multiply by 100 to get a percentage.

For example: Let’s say that your mortgage balance is $200,000 and the property is worth $300,000

$200,000 / $300,000 = 0.66 or 66% LTV

If you choose to do a cash-out refinance, for 240,000, for instance, then the LTV increases to 80 percent. If you set a limit on the loan amount, you can end up getting a good refinance rate.

8. Get a Fixed Rate to Enjoy Stable Savings

One aspect of refinancing is choosing between a fixed rate and an adjustable rate mortgage (ARM). A fixed rate doesn’t change throughout the life of the loan. On the other hand, an ARM starts with a fixed interest rate for a set period of time, usually 3, 5, 7, or 10 years. After this period ends, the interest rate can move either up or down for the remainder of the loan, which means that monthly payments may increase in the future. 

Refinancing into a fixed-rate loan makes it easier for you to budget and generally leads to more reliable savings in the long run.

9. Choose a Shorter Loan Term

Refinancing to a shorter loan term (e.g., from a 30-year to a 15-year mortgage) can help you score a lower rate of interest and help you save more interest over the loan’s life. However, since you are paying off your loan in a shorter period of time, the payments will be higher. Prior to refinancing into a shorter loan term, ensure that you are capable of handling higher payments.

10. Lower Your Interest by Buying Mortgage points

A mortgage point is an optional fee that’s paid to the lender to lower your interest rate. Typically, 1 percent equals 1 percent of the loan amount, and the exact amount that you can save with each point varies depending on the lender. The key benefit or mortgage points is that you can keep the lower interest rate for the life of the loan.

But before you refinance, you need to check whether the savings are worth the fee. For instance, if you pay $3,000 for 1 point on a $300,000 loan, and you are saving $150 a month in refinance, it will take 20 months to recoup the fee. That could be a worthwhile investment if you are planning to stay in the home longer than the break-even point.

11. Lock in the Best Refinance Rate

If you find a great refinance rate, you can ask the lender to “lock” the rate. A mortgage rate lock is essentially a guarantee from the lender that the interest rate will not increase while the loan is being processed.

The amount of time that you can lock the rate varies depending on the lender – it could be 30 days to over 90 days. Before you lock the rate, find out from your lender whether they charge for the rate lock, either as a dollar amount or a percentage of the loan, and how long it lasts.

If you think that refinancing is the right move, compare multiple rate and closing cost options based on your own situation. You can get real, custom rate and closing cost options in less than 30 seconds.