As mortgage rates remain at all-time-low levels that would have seemed unthinkable a year ago, homeowners keep saying “Yes, please” to refinances that mow down their monthly housing costs.
It’s a good defensive move for households that have been squeezed by the layoffs and business closings caused by the coronavirus pandemic.
But rates can vary widely from one lender to the next, and you may not always be offered the lowest one out there. So, if you’re determined to refinance and save, how do you score a mortgage rate that’s impressively low, instead of just — well, low-ish?
Here are six tips for getting the best refi rate you possibly can.
1. Be sure you’re a good refinance candidate
Will a refinance really save you money? According to the data firm Black Knight, more than 19 million homeowners who can lower their mortgage rates by at least three-quarters of one percentage point (0.75) would shave an average $299 off their monthly house payments.
It could be worth your while to refi if your current mortgage is fairly fresh, from early 2020. At that time, 30-year mortgage rates were around 3.75%, on average.
Rates last week fell to a record-low average of just 2.80%, says mortgage company Freddie Mac, which adds that it was the 11th time rates hit a new low since March.
Note that the best rates go to borrowers whose credit scores are exceptional (800 or above) or very good (740 to 799). If you don’t know your credit score, you can easily check it for free.
When you apply for your refi loan, you’ll also need to show income — which, for some, might be challenging during these times.
2. Shop around to find your best rate
To get the best deal on your refinance, you’ll want to compare rates from multiple lenders — and not settle for the very first loan you see.
Homeowners who shop around for their refi loans save an average of around $163 a month, or $1,953 a year, versus those who don’t, according to a LendingTree study from early 2020.
The savings can be truly eye-popping in high-price markets.
Borrowers in San Francisco who don’t shop around pay an average of more than $66,000 in extra interest charges over the life of a mortgage. In Boston, you’ll pay about $59,000 more, according to the study.
Good comparison shopping skills come in handy when it’s time to renew your homeowners insurance, too. Use a site that will help you gather prices from lots of insurers, so you can review them side by side and make sure you get the best deal on your coverage.
3. Be ready to pay closing costs
As with any mortgage, a refinance loan comes with closing costs. And, to land the lowest mortgage rate you can get, you may want to pay those costs upfront.
Typically, you’ll be charged fees equal to 2% to 5% of your loan amount. Including taxes, the average for mortgage closing costs in the U.S. is $5,749, according to the latest estimate from real estate data firm ClosingCorp.
Don’t have the cash to pay closing costs? You could do what’s called a no-closing-cost mortgage and have your lender cover some of the fees for you — but the downside is that you’ll be given a higher interest rate.
Another option is to roll the closing costs into your loan. But you’ll wind up paying interest on those costs, so this approach can raise your monthly payment and your lifetime interest tab.
4. Prepare to act fast
The coronavirus crisis has made financial markets volatile, and mortgage rates have become moving targets.
“Loan packages can get sent out and by the time they get returned, the rate may no longer be available,” says Richard Pisnoy, a principal with Silver Fin Capital Group, a mortgage broker in Great Neck, New York. “It is extremely important to be able to move quickly in this environment when locking a rate.”
That means working ahead of time to gather up all of the usual, necessary documentation — including pay stubs, bank statements and tax returns — and having that stuff ready to present to a lender.
Here’s another reason not to be a slowpoke about refinancing: A new 0.5% refinance fee takes effect Dec. 1 and threatens to push up the rates on those loans.
In fact, some lenders already have started passing the surcharge along to borrowers in the form of higher refi rates. It’s another good argument for shopping around and getting refinance offers from at least five lenders.
5. Have realistic expectations
People in the mortgage industry say some homeowners who’ve heard the Federal Reserve cut interest rates down to about zero to shore up the economy think they can get mortgages at 0%.
While home loans are being offered at the lowest rates in history, you won’t find one at 0%.
The Fed doesn’t have a direct impact on long-term, fixed mortgage rates, but on short-term and variable-rate loan products, such as credit cards and home equity lines or credit (HELOCs).
Even so, rates on those don’t match the Fed’s benchmark rate either. Instead, they’re tied to the prime rate, which is set by banks and moves up and down in sync with the Fed’s federal funds rate.
6. Be willing to pay ‘points’
Here’s one more piece of advice to help you snare the lowest mortgage rate out there: When you take out your loan, consider paying “discount points,” which are fees amounting to a percentage of your mortgage amount. One point equals 1% of what you’re borrowing.
Paying points reduces your mortgage rate, and it’s a strategy that has become even more effective, Pisnoy says.
“It seems that paying points may be able to go a little further than it used to,” he says. “Instead of lowering a rate by 0.25 of a percentage point when paying one point, maybe it will lower the rate even more.”
When you pay points, you “buy down” your mortgage rate — which also will lower your monthly mortgage payment.
One of America’s largest lenders is currently advertising a 30-year fixed-rate mortgage as low as 2.5%, but with estimated “finance charges” of $11,000. Presumably, those charges include points to help you bag your low rate.