Paying for your mortgage is a blessing and a big responsibility— it is a blessing because it means that you finally have your own home; and responsibility because it is another addition to your monthly bills to pay. You would jump at any opportunity to decrease the burden of your mortgage payments, right?
This is where a mortgage refinance comes in. If you play your cards right, you can get a better rate and hopefully pay less in the long term. Let’s explore what a mortgage refinance is and the ways to find the best rates on the market!
As defined by Investopedia, refinance refers to the process of revising and replacing the terms of an existing credit agreement. In other words, mortgage refinances would replace your current mortgage loan with a new one - ideally one with better conditions in terms of interest rate, mortgage fees, or length of the contract.
When refinancing a mortgage, the goal is to make favorable changes to the interest rate or payment schedules. Because there are great and not-so-great deals out there, one should thoroughly research their refinance options and the associated costs, like the closing costs and fees lenders charge for refinancing. Hint: there are options with no points or closing costs!
This is the most common reason why someone would refinance. It makes sense because even a quarter of a percentage point can make a big difference both in your individual payments as well as the long term cost of your mortgage. Keep in mind that getting at least 0.25% to 1% savings off of your mortgage interest rate makes your refinance worth it, according to most financial experts.
Typically, if you paid less than 20% of the property’s cost as your down payment, you have to pay for private mortgage insurance on top of your loan. When you refinance, you can often get rid of this insurance and save a ton of money compared to staying on your current loan terms.
Paying your mortgage in a shorter period is a great way to save some money. By refinancing your mortgage, you can shorten your 30-year mortgage to a 25 or 15 years term instead, very ideal for homeowners who want to pay off their mortgage before retirement. Yes, your monthly mortgage could be higher, but you will see the savings from the loan’s total cost when you compare the current term and refinanced term. Be sure to compare a few different term options to find the best refi for you.
For other homeowners, refinancing is a way to extend their loan term and lower their monthly payments. This is ideal for homeowners who are having trouble with monthly payments or experienced disruption in income. Refinancing in these situations can make mortgage payments somewhat more bearable.
The COVID-19 crisis has affected people across the globe, and our economy took a big hit from it, as well. Many entrepreneurs needed to close their business, and many workers have been laid off from their jobs. It has been arduous, but this pandemic also opened new options for people who want to refinance their mortgage, which can be a big help if you’ve lost a source of income.
Since the start of the pandemic, the refinance rates have been declining. As of September 14, 2020, the average Annual Percentage Rate or APR for the 30-year mortgage dropped to 2.967% and 2.530% for a 15-year mortgage.
This low rate is undoubtedly something that you should take into account when considering a refi, as it could bring you significant savings. Just note that most lenders are adding a bit in their fees, such as an agency fee. Also, due to the low rates, requirements to refinance have become stricter. But you won’t need to worry about it so long as you meet a few basic requirements when applying for your refi.
Meeting standard refi requirements could earn you the lowest rates out there. So before rushing and signing that contract, make sure to get all the information you need and do your research.
Your good credit score can lead you to the best rates when it comes to a mortgage. Improving it could let you refinance with a better term. It's best to review your credit report to see if some errors can be fixed to improve your score. Paying your bills on time is the easiest way to improve your credit score, but this should be done consistently for the best results.
As part of improving a credit score, one should also be paying attention to their credit card’s due dates and credit utilization ratio. Paying your dues on time or even earlier helps build a good credit history on your account. On the other hand, it is advisable to use less than 30% of your credit limit at a time to improve your utilization ratio. Having a higher credit limit while only using a small percentage of it helps earn you a great credit score.
Once you decide that you want to refinance, one of the best things to do is shop around for the best refinance rate. You may get a wide range of quotes from different lenders so you can compare each to find the best option for you. APR is crucial to understanding whether you will save some money on a specific quote but, make sure to check the interest rate and fees. Some lenders will even give you an APR that equals the interest rate - this means they’re not charging you any extra fees.
Be mindful of the closing fees included in the quotes because you may get better savings at a higher rate with low closing fees than at a lower rate with a much more expensive closing fee. Getting quotes from the lenders on the same day is best because mortgage rates change every day. This will give you a more accurate view of their differences.
As above, one of the reasons why someone considers refinancing their mortgage is to lessen or change their loan terms. You’ll usually get lower interest rates when you reduce your term, but it still depends on your current needs and financial status. Before looking for the best rates, decide on the term you’d like to take so you can focus on getting quotes for that term. If you’re unsure, an agent can help you compare a few different options to help you narrow it down.
Being organized and responsible with your budget is the best way to get lower refi rates. Paying bills on time and keeping your debt as low as possible will give you a high credit score and, in turn, better rates on your next refi.
Getting the best refinance rate can be tricky as each lender offers different rates and fees. However, with thorough research into all your possible options, you can get the best refi terms for your financial situation, whether you are after lower interest rates or adjusting your term duration.