Make the Most of Historic Low Refinance Rates by Following These Steps

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If you’ve determined it’s a good time to consider a refi, now it’s time to do the work needed to find the best mortgage refinance rates. With rates as low as they are, standards for approval are high and banks are being more stringent in choosing who to lend money to. Your application should be spotless, and your credit history should present you as a homeowner who is very likely to pay all debts in a timely manner. Lenders will look approvingly on those with credit ratings in the upper 700s and 800s. But even if you’re not there, there are things you can do to improve your chances.

Check Your Credit Report for Errors

Under federal law, you are eligible for one free credit report a year from each of the “Big Three” credit bureaus — Experian, Equifax, and Transunion. But from now until April 2021, each of those bureaus will be making reports available online for free once a week. Review each report carefully. If you find any errors, such as incorrectly marked missed or late payments, contact the agency with documentation so the report can be fixed before a potential lender accesses it.

Pro Tip

Step one: Check your free credit report for errors and dispute them immediately. Every point counts toward getting the best rate.

Improve Your Credit Utilization Ratio

Your credit utilization ratio shows how much of your available credit you’re currently using — and you want to keep it low. If you’ve been maxing out your credit cards, for example, now is the time to make an effort to pay them fully and eliminate debt. Paying down credit card debt can make a big impact on your credit score. Likewise, if you’re mired in student loan debt, anything you can do to whittle down the total you owe will improve your score.   

Responsible Credit Card Use  

None of this is to say you can’t use your credit cards, though. What’s important is making your payments on time and keeping the balances down. Your best bet, if you can, is to pay the total owed on your credit cards every month, so you’re not carrying a balance. Even if you can’t pay down the balance every month, at least covering new charges within a given month is a step in the right direction.

Don’t Trust Rates You See Online

Lenders want your business, so they usually post the lowest possible rates on their website — but to find the rate and, more importantly, the best APR, you’ll want to talk to a lending agent or broker in person or over the phone. Depending on your credit score, you may not be offered the posted rate.

Decrease the Term of Your Mortgage Only 

Lowering your monthly payment isn’t the only reason to consider a refinance. Shortening the period of time you’ll be paying off your loan — going from 15 years to 10, for example, can also save money in the long term and may not increase your monthly payments if you’re getting a better interest rate with the new mortgage.

The Best Time to Lock in Your Rate

The experts say there is no single “best time” to lock in your rate. It’s impossible to know when the low-interest rates will peak, so your best bet is to look at what you’d be saving when you’re ready — not where you think the market will be in a week or a month — and lock in at a rate enables you to meet your financial goals.

Determine How Long You Plan to Stay in the Home

As mentioned above, there are costs associated with doing a refi, and those costs will be due either at closing or rolled into your monthly payments. Jill Schlesinger, CBS news analyst and author of “The Dumb Things Smart People Do With Their Money,” says you need to do the math and figure out how many months of monthly payments you’ll make before recouping your costs — which then makes it worthwhile for you to have done the refi.

Shop and Compare Rates 

We can’t stress this enough: Shop around. “Your rate is specific to your own circumstances,” says Greg McBride, CFA, chief financial analyst for Bankrate.com. Phone interviews with mortgage specialists need to be part of your plan, when possible, since the rates posted online may not match what’s available and fit for your mortgage.

Key Terms to Understand

“No closing cost” loans

These can sound appealing, but know that you’re not saving money with them. Closing costs are merely rolled into your principal payments rather than coming due at the closing.

Interest rate vs. APR

Your interest rate is the cost of borrowing the principal of your loan, and it can be fixed or variable. APR, or annual percentage rate, includes interest plus other one-time fees, including some closing costs, and is generally higher, but it is a more accurate reflection of what you’ll be paying.

Closing costs

Can range from $1,000 to $5,000 or more. They are usually due at closing but may be rolled into your monthly payments in some cases.

PMI

If you have an FHA, USDA, or VA loan, or if you put down less than 20% on your mortgage, you may be paying PMI (private mortgage insurance). A refi may allow you to eliminate this payment.

Points

A point is worth 1% of the total mortgage; if you owe points on your refi, they may be due at closing.

Negative amortization

Sometimes found in adjustable-rate mortgages, this term refers to paying less than the full amount of interest each month, which is then added to the loan’s balance. It can increase your risk of sticker shock at the end of the loan period, when interest rates may be higher.

In Summary

Although mortgage lenders have been inundated with applications since the beginning of the economic downturn, this is still a good time to investigate your options for a refinance. “Right now, you have some breathing room,” says Schlesinger. So take the time to explore the rates and make sure you understand the underlying costs of doing a refinance.