Another drop in mortgage rates has given homeowners new incentive to refinance — and potentially save hundreds of dollars a month, maybe thousands over time.
Rates recently returned to near all-time lows reached earlier this year after regulators announced they would be waiving a COVID-related refinancing fee. Many lenders had increased their mortgage rates as a way to pass the fee on to borrowers.
Now, the 30-year fixed mortgage rate has fallen to an average of just 2.78% in mortgage giant Freddie Mac’s long-term weekly survey, not far above January’s record low of 2.65%. Some lenders currently advertise 30-year rates at: 2.5% and even lower.
If you own your home, you’re probably due for a refinancing: Most homeowners have never refinanced in the past year due to extremely low mortgage rates, a Zillow survey found it. Here are four tips for getting the best deal when taking out a new 30-year mortgage.
1. Get different mortgage offers and compare rates
Transferring to another 30-year loan may be the right choice if your current mortgage is relatively young. You won’t rack up your interest costs as much if you’re only in the house for a year or two.
Rates have fallen so far that you are an excellent refinance candidate if you have a mortgage that you have recently taken out early 2020, when the average 30-year yield was around 3.75%.
But you can’t assume that a lender will always offer you the lowest rate available. Different lenders can offer the same homeowner vastly different refinancing rates.
To find your best refi deal, shop around and compare rates – don’t stop looking at the very first loan offered to you.
Hunting for a bottom rate is worth it. Found a Freddie Mac study if you receive five price quotes, you pay a lifetime cost of $3,000 on average less than when you end your search after hearing from just one lender.
2. Improve your credit score
A better credit score means better mortgage rates. Lenders like borrowers whose credit scores are very good (in the range of 740 to 799), if not exceptional (800 to 850).
To get the kind of refinancing loan that will save you hundreds each month, you need a score of at least 720, according to mortgage data and technology firm Black Knight.
Don’t know your credit score? Nowadays it is quite easy to take a look for free.
If you find that your credit score needs some help, take steps to increase it:
Pay off debt, especially on credit cards. A debt consolidation loan can help you get rid of your credit card debt faster and at a much lower interest rate.
Don’t open new credit cards, but don’t close old ones either. Closing accounts can reduce your available credit, which can hurt your score.
Get your hands on your credit reports and make sure there are no mistakes that can lower your credit score. in a recent Consumer Reports survey, a third of volunteers who checked their credit reports found errors.
3. Show a lender that you’ve invested in your home
Refinancing homeowners who have a healthy amount of equity in their homes tend to: score the lowest 30-year refinancing rates.
Equity is the percentage of the value of your home that you own. To determine your equity, take the amount you have already paid on your home and divide that by what the home is currently worth. The result — which should be to the right of a decimal — represents your share percentage.
For a lender, the ideal refi candidate has at least 20% equity, Black Knight says. If you still have a ways to go to reach the 20% level, you’ll want to make a deposit that will get you over the line.
As an added bonus, you’re not forced to buy or keep paying private mortgage insurance if you have at least 20% equity in your home.
Private mortgage insurance offers a lender protection in the event a borrower defaults. It should not be confused with homeowners insurance – which offers you protection if your home is damaged by fires, tornadoes and most other types of disasters.
You should already have home insurance – it’s vital and most lenders need it. But every time your homeowners policy needs to be renewed, you go online and get a lot of price quotes so you can rest assured that you’re not paying too much for your coverage.
4. Be prepared to pay ‘points’
The optional fees known as “discount points” are a type of prepayment that allows you to get a low 30-year mortgage rate. One point is equal to 1% of your loan amount and can reduce your rate by as much as a quarter of 1 percentage point, say from 3% to 2.75%.
Amazing mortgage rates often – but not always – come with points.
“By paying points, you pay more upfront, but get a lower interest rate, so you pay less over time,” says the U.S. Consumer Financial Protection Bureau. “Points can be a good choice for someone who knows they will keep the loan for a long time.”
You need time to break down points and other closing costs before you can really start enjoying the savings from your low mortgage interest rate.
The CFPB says lenders have their own individual pricing structures, so don’t assume that a points loan will always have the lowest rate. You may find another lender offers a zero-point loan at a better rate.
It’s another good reason to collect multiple loan offers and look at them side by side – to make sure you’re getting the cheapest mortgage you can get.