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Many people think that to find the lowest mortgage refinance rates means looking up some lenders and / or brokers and seeing what they advertise, maybe call a few of them to confirm.
But that’s not enough. To qualify for the lowest interest rate, you need to be prepared, to know your objectives and have your finances in order.
Here are 7 things you can do to help you find the lowest refinance mortgage interest rates available.
1. Increase Your Middle Credit Score
Lenders correlate your middle credit score with risk level. 620 is as low as many will go, while some stop at 640. The groups go like this:
620-639, 640 to 659, 660-679, 680-699, 700-720, 721-740, 741+.
That means there’s a difference in how they treat 659 vs 660 though they are next to each other but not 662 vs 678, for instance. And significant differences between tiers.
The way to increase your scores is to make sure the information on your report is accurate (the credit bureaus have been known to make mistakes) and to lower the amount you owe on credit cards. A good part of how your credit scores are determined has to do with how much of the credit available to you you’ve used. The best position is to use less than 30% of what’s available to you (in total and on individual cards).
By law, once a year, you can get a free report from all three bureaus without getting a hit on your scores. You do that by visiting www.annualcreditreport.com, calling 1-877-322-8228 or completing the Annual Credit Report Request Form and mailing it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
2. Lower the Minimum Payments You Have on Credit Cards and Loans
Most people think you must lower your debt. But that’s only partially true. Lowering your debt on credit cards (while keeping your cards open) increases your scores.
It’s the minimum monthly payments that matter. If you owe $1000 on a credit card with $50 minimum payment, you’re in the same place as if you owed $5000 on a credit card and the minimum payment was $50.
Because the minimum payments determine your DTI (debt-to-income ratio).
For conventional mortgages, most lenders allowed your DTI to go to 45% with many going as high as 50% for people with good credit.
The easiest way to lower the minimum payments is to reduce the amount you owe. But you could also change creditor. For instance, you could refinance your car loan. Or sell the car you had a loan on. (Don’t make the mistake of paying off credit cards and closing them… That reduces your scores. See my point above about the relationship between used and available credit.)
Lower DTI translates into lower interest rates, usually. So, just because you can qualify with a DTI of 50% does not mean you should.
3. Increase the Equity You Have in Your Home
You’re probably thinking, I want to find the lowest mortgage refinance rates, what are you talking about increasing the value of my home?
Think of it this way: if you end up in foreclosure and you owe $100,000 on a home worth $200,00 and you end up in foreclosure, the lender ends up with $100,000 + whatever principal you paid down by the time you end up in foreclosure less foreclosing fees.
If you end up in foreclosure and you owe $175,000 on a home worth $200,000, the lender ends up with $25,000 + whatever principal you paid down by the time you end up in foreclosure less foreclosing fees.
Which one do you think lenders feel better about?
So, how do you increase the equity you have in your home?
- Paid down principal (which takes a lot of time unless for most people).
- Raise the value of your home (remodel it or add living space). Or, more precisely, the appraiser’s opinion of the value of your home. You get the best bang for your money by painting and cleaning the home and having the house well lit when the appraiser comes. (I used to be a real estate appraiser and owned an appraising company for a decade.)
4. Organize Your Documents
Organizing your documents means your credit report is accurate, you have the documents required to apply the day you apply. I know this does not seem like it has much to do with you trying to find the lowest mortgage refinance rate but it does. Here’s how:
Not having those documents ready from the beginning can delay things to the point where you must pay to have your rate lock extended. Seems to cost about 0.3% of the loan amount ($300 for every $100,000).
If you are a wage-earner, you need:
- Pay stubs for the 30 days prior to applying
- W2’s for the previous two years
- Federal tax returns for the previous two years.
- Bank statements for the previous 2 months.
If you are self-employed, you need:
- the tax returns for the previous 2 years
- bank statements for the previous 2 months.
If you have income coming from companies you own, you need tax returns for the previous two years for each company (including the K1 form).
If you own real estate properties, for each property you own, you’ll need to provide:
- property insurance info,
- the last mortgage statement (unless it’s still Covid19 time, then you need 2) and,
- for condos, the last homeowner’s association bill you received.
If you’re not a US citizen, you need whatever document you have that gets you the right to be in the US (for alien cards, copies of the front and the back; for other documents the front (or the part with your photo).
4. Save Cash for Your Closing Costs
Closing costs for a refinance are much lower than those for a purchase. Still, if you do not have the money, you’ll have to either roll them into the loan (if there’s equity and your DTI allows it) or get a higher interest rate to get lender credit.
5. Decide on the Loan Term
Once your preparations are complete, you can begin to shop around for the refinance that works best for you.
Your shopping for a refinance interest rate should start with you figuring out how much money the loan amount you have in mind will cost you each month. The type of loan and the terms determine the rate, which determines the monthly dollar amount.
If you go online, and search for mortgage calculators and pluck in your loan amount, the years, and the interest rates, you’ll have a good idea.
6. Shop Around for A Refinance Rate the Smart Way
To find the lowest mortgage refinance rates, you need to find a great lender. There are community or regional banks, national banks, credit unions and mortgage brokers.
If you have credit, employment or down payment issues, you’re probably better off going with a mortgage broker; if not, one of the others is probably better.
Don’t focus on finding the one with the lowest rate, focus on finding the one with the lowest rate that you trust. Trust is quite important.
In addition, once you’ve found your finalists, to make sure you’re getting the lowest rate, have them tell you, in writing, what they can do for you at about the same time for the same type of loan and terms. And you want them to do it based on your full info.
Here is the reason for doing it at about the same time:
Interest rates change often, sometimes more than once a day. Lender A’s rate on Tuesday is lower than Lender B’s rate on Wednesday. But that does not mean Lender A is the one to go with. You need to know Lender A’s interest rate on Wednesday to make that decision.
And here is the reason you want to do it based on full info:
The interest rate lenders advertise is, usually, the best interest rate they can give to their best borrowers for a detached, single family house. Variations from the best customer profile result in changes, but not all lenders change the same.
Scenario A. (A Purchase)
1. Lender A can give a borrower a 30-year, fixed mortgage loan with an interest rate of 4.000% if it is for the purchase of a detached single family house and the score is 700, the LTV (loan-to-value ratio) 80%, the DTI (debt-to-income ratio) is 35% and the borrower is not a first-time-home buyer.
2. Lender B can give the same borrower for the same exact situation a 30-year, fixed loan with an interest rate of 4.375%.
Scenario B. (A Purchase)
Let’s make three changes to the above scenario. Let’s change single family house to 3-unit property; the score to 678, the LTV to 95%. With these changes in mind,
1. Lender A can give the borrower a 30-year, fixed mortgage loan with an interest rate of 4.625%.
2. Lender B can give the borrower a 30-year, fixed mortgage loan with an interest rate of $4.375.
Scenario C. ( A Purchase)
Let’s make 2 changes to Scenario A, specifically, let’s make the borrower a first-time home buyer and change the DTI to 48%.
1. Lender A can give the borrower a 30-year, fixed mortgage loan with a rate of 4.250%.
2. Lender B can give the borrower a 30-year, fixed mortgage loan with a rate of 4.500%.
Scenario D. (A Cash-out Refinance)
Let’s change nothing in the scenario except that this is for a cash-out refinance. .
1. Lender A is willing to give the borrower a 30-year loan with an interest rate of 4.500%.
2. Lender B is willing to give the borrower a 30-year loan with an interest rate of 4.500%.
Things like the above scenario results happen all the time. The same lender can have the best rate for one situation but not for another. It all has to do with how risky they consider some features.
7. Review All Your Loan Options
When you talk to lenders, they’ll cover various loan products with you, explaining to you the advantages and disadvantages of each. You’re looking at interest rate, mortgage insurance premiums, and closing costs and is the rate offered contingent on you paying to buy it down and how much. If you plan to have the loan for a short period of time, closing costs might be more important than interest rate. If you plan to have the loan for a long period of time, interest rate is going to be more important than closing costs.
Find The Lowest Mortgage Refinance Interest Rates At Your Bank?
You’d probably love it more if you could find the lowest mortgage refinance rates by just going to your bank. But your bank does not always have them. Or not for the particular situation you are in. Shopping around for a lender, therefore, is important.