As the economy recovers from the beating of COVID-19, mortgage rates are expected to rise.
It hasn’t happened yet. Rates have risen in recent months, from an all-time low in early January to a 10-month high in early April – then down again.
According to a popular survey, the 30-year average fixed mortgage rate is now below 3%, which has opened up refinancing opportunities for millions of homeowners.
Rates vary widely from lender to lender, but these four tips will help you feel confident you’re getting the best deal when refinancing for 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.
Rates on 30-year fixed-rate mortgages are currently averaging 2.95%, according to the long-running weekly survey from mortgage giant Freddie Mac. A year ago, the average rate was 3.15%.
You could be a great refi candidate if you took out a mortgage in 2019 when average rates were as high as 4.5%.
To find a refinance loan of less than 3%, you need to shop around and compare the rates of several lenders. A study by Freddie Mac found that if you get five quotes, you’ll pay lifetime costs of $ 3,000 on average less only if you are only reviewing one loan offer.
It is estimated that 14.1 million Americans still have the option to refi and lower their interest rates by at least three-quarters of a point (0.75), according to a recent study by the technology and data provider Black Knight Mortgage. That’s enough to save an average of $ 287 per month, says Black Knight.
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.
Don’t know your credit score? It’s pretty easy to have a look at it for free.
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 can 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 cancel cards, you’ll reduce your available credit – and it could hurt your score.
Get a hold of your credit reports and make sure no mistakes lower your credit score. An analysis by the US Public Interest Research Group found that complaints to the government about credit report errors had reached record levels during the pandemic.
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, thanks to the payments you have made so far.
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 mortgage down payment that will put you above the line.
As an added bonus, when you have at least 20% equity in your home, you won’t be required to purchase or continue to pay for private mortgage insurance.
PMI provides lender protection in the event of a borrower default. 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 home insurance policy gets renewed, go online and put together a bunch of competing quotes so you can be sure you’re 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%.
Truly breathtaking mortgage rates often – but not always – come with points.
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. In other words, a refi may not be the right decision if you want to move quickly enough.
Lenders have their own pricing structures, so don’t assume that a point loan will always have the lowest rate. You may find that another lender offers a loan with zero points and a better rate.
This is another great reason to research multiple loan offers and review them side by side – to make sure you’re getting the best possible mortgage rate.