5 Steps to Getting the Best Refinance Rates

best refinance rates

Refinancing your mortgage loan can be a great way to lower your mortgage payment and interest rate.

Even with just a .5% lower rate you can save tens of thousands of dollars on your home loan.

Getting the best refinance rate can save you a ton of money.

We’ve put together some tips to help you get the best mortgage refinance rates possible.

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Step 1. Improve Your Credit

Before applying to refinance your mortgage pull a copy of your credit report to check for any errors. You can get your credit report once a year for free from www.annualcreditreport.com.

Errors on credit reports happens more often than you think. It’s been reported that 60% of American’s have at least one error on their credit report.

If you find errors, you should dispute them with all three major credit bureaus, Equifax, Experian, and Transunion. When you dispute an account, the credit bureau has 30 days to investigate into the accuracy of the item and update the status.

Step 1. Check Your Credit Scores

A borrowers credit score is the biggest factor in determining the interest rate on a mortgage loan. The better your FICO score, the better rate you’ll be offered. Making sure your credit score is as high as it can be is easy. You’ll just need to get your free credit scores.

You can pull a free copy of your credit report and scores from these apps/websites.

Credit Karma

Credit Sesame

After you have disputed any errors, look for other ways to increase your credit score quickly.

Pay down credit card balances – Your credit utilization ratio is the amount of available credit you are using. The higher your balances are to their credit limit the lower your score will be. Pay down your card balances to less than 15% of their limits to increase your score as much as possible before applying.

Do not apply for new credit or loans – When you apply for any type of credit or loan, the creditor will pull a copy of your credit history. This is called a hard inquiry and will negatively affect your credit rating. Wait until after you refinance your mortgage before you buy a new car or get a new credit card.

Step 2. Compare Multiple Refinance Offers

Don’t make the mistake of refinancing your mortgage with your existing mortgage company, or one of the first lenders you talk to. Home refinance rates will vary depending on the mortgage lender you use.

With a mortgage refinance there are closing costs involved that can add up to 1%-3% of the loan amount.

You should get a loan estimate from at least 3 different mortgage lenders to compare the rate and closing costs.

Some fees, even the interest rate can be negotiated down. You can use one loan estimate to get a better deal from other lenders.

Your local bank or credit union can refinance your mortgage, but online lenders may offer the best refinance rates.

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Step 3. Lower Your Debt

We already spoke about how paying off credit card debt can increase your credit score. But it also lowers the amount of debt you have.

The less debt you have the lower your debt-to-income ratio will be, which results in a lower refinance rate and lower fees because you present less risk to lenders.

If you can pay off credit cards, personal loans, student loans or an auto loan you will greatly improve your debt-to-income ratio so you’ll be offered lower interest rates.

Step 4. Get a 15-year Fixed Rate or ARM

Shorter loan terms come with lower mortgage rates. Typically, a 15 year fixed rate mortgage has about a 1% lower interest rate than a 30 year fixed-rate loan.

Since you are paying your mortgage in half the time you will save tens of thousands in interest. However, your monthly mortgage payment will be higher with a 15-yr mortgage. Make sure you can afford the higher mortgage payments before refinancing into a 15 year loan.

An adjustable-rate mortgage has a variable rate that starts off low for a period of time, then increases. A 5/1 ARM is the most popular adjustable rate loan. You are able to get a low initial rate for 5 years before it increases.

An alternative to a 15 year loan is to get a 30 year fixed rate loan but pay additional principle each month to have it paid off in 15 years. You will not get a lower rate, but if you run into any financial issues you are not locked into a higher payment.

Step 5. Lock in Your Rate

Interest rates adjust daily based on the Federal Reserve. You can lock in your rate with lenders whenever you want.

Deciding when to lock-in that rate takes knowledge and experience, your loan officer should be able to help you determine when to lock in a rate.

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Types of Refinance Programs

Cash-Out Refinance

If you have a loan-to-value ratio on your mortgage of 70% or lower. You may be able to get cash using your home equity.

A cash-out refinance will pay off your existing mortgage and provide up to 80% of the home’s market value in cash. Requiring just one mortgage payment to cover the home loan and additional cash.

The benefits of a cash-out is that you receive cash that is repaid over the term of the loan for an interest rate much lower than a personal loan or home equity loan.

Home Equity Loans

A home equity loan and home equity line of credit (HELOC) work similarly to a cash-out refinance. However, instead of refinancing your existing loan you are using your home equity to get a second mortgage.

Home equity loans generally have short terms of 5-10 years. However, a second mortgage is more difficult to qualify for than cash-out refinancing.

FHA Streamline Refinance

If you have an FHA home mortgage you can refinance your loan with an FHA streamline refinance. The streamlined process speeds up the refinancing process and allows for minimal documentation.

Many people who have FHA loans are first-time home buyers or may not be aware they can refinance to get a better home refinance rate and lower monthly payment. You may be able to reduce your mortgage insurance premiums with a streamline refinance.

VA Loan Refinance

VA loans do not require PMI. If you already have a VA loan there is a VA streamline refinance program available. However, if you do not have a VA mortgage and now qualify for one, you can save money on mortgage insurance by refinancing into a VA loan.

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