But before you start shopping around for the
lowest rates, experts say you should establish your objectives and
prepare your finances to improve your chances of qualifying for the
lowest interest rate.
“First, figure out the best loan product to
meet your financial goals, and then you can start looking for the most
competitive mortgage rates,” says Michael Jablonski, executive vice
president and retail production manager for BB&T Mortgage in Wilson,
North Carolina.
Here are 12 steps that will help lock in the lowest refinance rate possible:
No.1: Raise your credit score
"Typically, a credit score of 740 or higher
puts borrowers in the best tier for a conventional loan program," says
Michael Smith, first vice president – business development manager for
mortgage lending for California Bank and Trust in San Diego.
Most lenders require a minimum credit score of
620 to 640, but you'll pay a higher mortgage rate for conventional
loans unless your score is 740 or above. However, some portfolio lenders
set their own guidelines.
30 Yr. Fixed - Refinance Rates from Our Lenders in California
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No. 2: Lower your debt
Paying bills on time and paying down your
credit card balance can reduce your debt-to-income ratio, or DTI, which
improves your chances of qualifying for a low mortgage rate, says
Jablonski.
A good rule of thumb is to make sure your debt-to-income ratio is no more than 36 percent, and even lower is better.
"Don't buy a new car, make other major
purchases or fill out multiple credit applications before you refinance,
because all of those actions can hurt your credit profile," says Smith.
Even if you have a high credit score, you may
be denied a refinance altogether or subjected to higher interest rates
if your DTI ratio is too high, says Jablonski.
No. 3: Increase your home equity
Remember that your credit scores and the
loan-to-value ratio of your property could have a much bigger impact on
your refinance rate than a slight shift in average mortgage rates, says
Malcolm Hollensteiner, director of retail lending sales for TD Bank in
Vienna, Virginia.
"Both a lower-than-average credit score and a high loan-to-value can lead to a more expensive interest rate," he says.
If you are underwater on your mortgage, a Home Affordable Refinance Program (HARP) loan may be your best option.
No. 4: Organize your financial documentation
You should get your credit reports from all
three bureaus to make sure there are no mistakes that need correcting
before you apply for a refinance, says Smith.
A refinance application typically requires two years of tax returns with W2s, two recent pay stubs, and your two most recent bank and investment statements.
"Gathering these materials ahead of time can
expedite the loan process and prevent you from paying extra for an
extension of your rate lock," says Smith.
No. 5: Save cash for closing costs
Closing costs average about 2 percent of the loan amount.
"You can pay cash for the closing costs or, if
you have enough equity, you can roll these costs into your new loan,"
says Hollensteiner. "Another option that some lenders offer is to pay a
higher interest rate for a lender credit to cover those costs."
Shop smart for your refinance
Once your preparations are complete, you can begin to shop around for the refinance that works best for you.
No. 6: Start online
Deborah Ames Naylor, executive vice president
of Pentagon Federal Credit Union in Alexandria, Virginia, recommends
starting online with a refinance calculator that estimates your monthly
payments at various loan terms.
"A shorter term loan will have a lower
interest rate than a 30-year fixed-rate loan, but the payment will be
higher because you're paying it off faster," says Naylor. "It's
important to decide what payment you're comfortable making before you
see a lender, because that payment could be much less than the payment
you qualify for."
No. 7: Decide on a loan term
Barry Habib, founder and CEO of MBS Highway in
New York City, says the loan term you choose needs to be made in the
context of your other financial obligations and plans.
"If you have $30,000 in credit card debt and
no savings for college, you may want to go for a 30-year loan to keep
the payments as low as possible," says Habib. "Someone else may want a
shorter term to build equity faster while another borrower might want a
longer loan so they can keep their tax deduction as long as possible."
No. 8: Talk to multiple lenders
Once you’ve decided on your loan term ,it’s
time to research loan products available from a credit union, a regional
or community bank, a direct lender and a national bank to find out what
special programs they offer, says Naylor.
"Many lenders offer 'portfolio loans,' ones
they keep in-house instead of selling on the secondary market," she
says. "They can be more flexible with those loans and offer special
promotions."
Instead of choosing a lender solely based on
current mortgage rates, Russ Anderson, senior vice president and a
centralized sales executive with Bank of America in Los Angeles, says
you need to find a lender you can trust. "People get too wrapped up in
the rate rather than finding someone who will communicate with them," he
says. "You need to find someone you trust, who will be engaged in your
family's financial situation."
No. 9: Review all your loan options
Lenders can discuss various loan products when you interview them.
"There's a broad product mix of conventional
financing, government-backed programs like FHA loans and special
refinancing programs through the Making Home Affordable program," says
Anderson. "A good lender can present the pros and cons of each of these
programs in the context of your individual finances."
No. 10: Decide how you will finance your refinance
You’ll also need to decide how to pay for your
refinance. Closing costs and lender fees can be paid at closing,
wrapped into your loan balance or you can opt for a "no-cost" refinance.
"A no-cost refinance means that your lender
will pay the fees and you'll pay a slightly higher interest rate of
one-eighth to one-fourth percent," says Habib.
HSH.com's “Tri-Refi” refinance calculator can help you decide the best way to finance your refinance. Here's how:
HSH.com’s Refinance Calculator
We've been asked thousands of times: "Is it
better to pay closing costs out of pocket, finance them into the loan
amount, or trade them for a higher interest rate?" There's no one simple
answer, since each refinance choice has its own benefits and total
costs over time. One may be more or less expensive depending upon how
long you'll hold onto the mortgage. Our unique calculator allows you to
run the numbers for a Traditional Refinance, a Low-Cash-Out Refinance
and a No-Cost Refinance so you can determine which is best for you. Fill
in the information once and instantly compare the costs and savings.
No. 11: Compare mortgage rates and fees
Advertised mortgage rates are sometimes based on paying points, so you need to make sure you compare loans with zero points or the same number of points.
"It's important to shop for the same loan on
the same day to get a true comparison of mortgage rates, because
mortgage rates change every day," says Smith. "You need to explain to
each loan officer all the criteria for your refinance, not just ask
'what's today's rate on a $200,000 loan?' You should also ask about loan
processing times."
Shopping by APR can be confusing, since
different lender fees and policies can affect the outcome. It is
possible for two loans to have identical rates and fees and different
APRs. Conversely, two loans could have the same APR but different
interest rates. Because of this, it is usually better for you to focus
instead on the two most important components of APR: interest rate and
fees.
The most important component of your refinance
will generally be the interest rate, so you'll of course want to pay
attention to that. Fees and closing costs matter, but whether you want
or need to pay them will depend upon your situation. There are times
when paying costs to obtain the lowest mortgage refinance rates can make
sense and times when it does not.
No. 12: Know when to lock-in your rate
Once you’ve finalized your loan decision you should consult your lender about when to lock-in your rate.
"Processing times for different lenders can
range from 30 to 45 days to more than 90 days," says Smith. "Typically,
lenders will do a 30- or 45-day rate lock, so you should be consulting
with your lender to determine the appropriate day to lock your loan. If
you have to extend the lock or re-lock your loan, that will likely cost
you more money."
While shopping around for a refinance may take
a little longer than refinancing with your current lender, the rewards
can last as long as your loan
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