By Dawn Springer
Mortgage rates may be rising but there's still room to refinance your home loan. You might have heard much said about the constant rise of interest rates over the past year, with some blaming that for a recent dip in home sales. Yet mortgage rates remain near record lows, presenting an opportunity for homeowners to save on their monthly mortgage payment if they buy now.
As it stands, the average rate on a thirty-year fixed rate mortgage is 4.07%. Some expect it to move higher, potentially reaching 5% next year. It means that the clock is ticking for homeowners thinking about refinancing. However, it doesn't mean they should rush through the process, making costly mistakes along the way. There are a few different methods and tricks of the trade that can help you refinance your mortgage for greater savings.
From knowing your credit score to comparison shopping, we've found six ways to ensure you get the best deal on your first mortgage refinance.
6 Strategies for Your First Mortgage Refinance
1. Be Nimble but Thorough
It's true that mortgage rates are still at record lows, but that's not expected to last for too much longer. Between the Federal Reserve's rate-raising mood and more hikes expected next year, the cost of borrowing money to purchase a home will probably increase. As mortgage rates rise, existing homeowners will have less opportunity to refinance into a lower interest rate mortgage. As a result, homeowners need to act soon if they're considering refinancing their current loan.
Even if you don't plan to use the money until next year, it would be smart for you to do it now before rates increase any further. You don't want to miss the boat on paying the least amount possible on your mortgage, nor do you want to get shut out of the refinancing process altogether.
Acting quickly doesn't mean doing it blindly. Make sure to do your homework and compare rates between different lenders to ensure that you're getting the best rate at the least possible cost. A refinance comes with the same costs that a mortgage does — that includes the loan origination fee, an appraisal report, the title search, the title insurance, and the recording fee.
2. Check Your Credit Score Before You Start the Process
The point of refinancing is to get a lower interest rate and thus pay less over the life of the loan. However, if your credit score suffered since you purchased your first home, you may not save anything. Lenders determine the interest rate you pay based on your credit score. If it's above 760, your rate will be among the lowest available. If it has dipped below that, expect to pay more. That may make any savings from a lower interest rate a wash.
Before starting the process, get copies of your credit report from the three credit reporting agencies — Experian, Equifax, and TransUnion — to ensure there aren't any issues in it that might make the cost of borrowing higher. Your credit score can improve quickly by paying your bills on time and by staying on top of your credit card balance. Join MoneyTips to see your three credit reports today as part of a free trial.
3. Comparison Shop to Save
Homeowners scour the Internet and view multiple properties before settling on one to purchase. They also shop around for their mortgage. That same discipline should be applied to refinancing an existing mortgage. Sure, it's easy to stick with your existing mortgage lender but, if they aren't giving you the best deal, you need to move on.
The average interest rate will be similar from one lender to the next, but there are also those closing costs associated with a mortgage refinance that can vary. As a result, homeowners have to comparison shop, looking at everything from the interest rate to the loan fees. Customer service matters too. You want to go with a lender that will provide the best interest rate and top-notch customer service to protect you in case any issues arise. If the refinance process takes longer than anticipated, and rates move higher before it closes, it could preclude you from getting a better loan.
4. Consider Paying Points
Before your mortgage refinance is complete, you'll be given the option to pay for points to lower the interest you pay over the life of the loan. Ideal for homeowners with the cash to spend, purchasing points can save a lot in interest. Purchasing points is basically prepaying the interest on the mortgage. The more points you purchase, the lower your interest rate will be. How much you pay for points will depend on the lender, but purchasing one point will generally reduce the interest rate on your mortgage between one-eighth and one-quarter of a percent.
5. Refinance into a Shorter-Term Loan
Cash-strapped homeowners are looking to save with a mortgage refinance, but for those who have money, it can be a way to get out of debt much faster. If you're in the latter situation, you can refinance your mortgage into a cheaper loan and shorten the term so that you're paying the whole price off sooner. Instead of a thirty-year fixed-rate mortgage you can reduce your debt's life with a fifteen or ten-year mortgage instead. It also enables you to build equity in the home at a faster pace.
Make sure you can handle the increased payment if you refinance into a shorter-term mortgage. You don't want to harm other financial goals, such as retirement savings, to pay down your mortgage quicker. It also matters how long you plan to stay in your home. If you refinance into a ten-year loan, you'll end up paying more interest in the beginning. If you plan on moving in a year or two then the mortgage refinance suddenly becomes really expensive.
6. Don't Mess with Your Credit During the Approval Process
Just because you got approved for a refinance doesn't mean that it's a guarantee. Most lenders will run a credit check a few days before the closing of the loan. If they find new accounts or big purchases that alter your debt-to-equity ratio, and thus your credit score, you could end up with a higher interest rate or, worse, losing the ability to refinance altogether. Rule of thumb: as soon as you start the refinancing process, don't charge up existing credit cards, finance a big purchase, or otherwise mess with your credit standing.
Interest rates are rising but they're still at record lows, providing homeowners with the ability to refinance their existing mortgage loan into a cheaper and possibly shorter one. In order to benefit, however, you must ensure your credit score is in good standing and your debt load is low. The amount you pay and whether it's worth it is still dependent on your credit score, even if you're already a homeowner.
Dawn Springer is a home equity expert who's helped countless people finance their homes and navigate the mortgage options they have.
Each credit reporting agency produces their own report, so your three reports might not contain all the same information. Therefore, it's important to obtain a copy of each and review it on a regular basis. Join MoneyTips to see your three credit reports today as part of a free trial.