1. Gather mortgage offers and compare rates
Refinancing into another 30-year loan can be the right choice when your current mortgage is relatively young. If you've been in the home just a year or two, you won't be stretching out your interest costs all that much as you reset your payback clock to 30 years.
Rates on 30-year fixed-rate mortgages are currently averaging 3.10%, according to the long-running weekly survey from mortgage giant Freddie Mac. You could be an excellent refi candidate if you have a mortgage you took out in 2019, when average rates went as high as 4.5%.
Nearly half the homeowners who scored a lower rate and refinanced during the first full year of the pandemic — from April 2020 to April of this year — are now saving at least $300 a month, according to a recent Zillow survey.
To find a below-average refinance loan under 3%, you'll have to shop around and compare rates from several lenders. A Freddie Mac study found if you review five rate quotes, you'll pay lifetime costs averaging $3,000 less than if you review only one loan offer.
2. Polish up your credit score
A better credit score brings better mortgage rates. Lenders like borrowers whose credit scores are very good (in the 740-to-799 range) if not exceptional (800 to 850).
To get the kind of refinance loan that will save you hundreds of dollars a month, you'll need a score of at least 720, says the mortgage data and technology firm Black Knight.
Don't know your credit score? These days it's easy enough to get a peek at your credit score for free.
If you find your credit score needs some help, take steps to raise it:
- Pay down your other debt, especially on credit cards. A debt consolidation loan can help you get rid of credit card debt more quickly, and at lower interest.
- Don't open new credit cards, but don't close old ones either. If you cancel cards, you'll reduce your available credit — and that could hurt your score.
- Get your hands on your credit reports and make sure there are no errors dragging down your credit score. An analysis by the U.S. Public Interest Research Group found complaints to the government about credit report errors surged to record levels during the COVID era.
3. Show a lender you're invested in your home
Refinancing homeowners who have healthy amounts of equity in their homes tend to score the cheapest refinance rates. Equity is the percentage of your home's value that you own, through the payments you've made so far.
To 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 refinance loan down payment that will put you over the line.
As an added bonus, when you've got at least 20% equity in your home you won't be forced to buy or keep paying for private mortgage insurance.
PMI offers a lender protection in case a borrower defaults. It's not to be confused with homeowners insurance — which offers you protection if your house is damaged by fires, tornadoes and most other types of disasters.
You should already have home insurance — it's vital, and most lenders require it. But each time your homeowners policy comes up for renewal, go online and gather a bunch of competing quotes so you can feel confident you're not overpaying for your coverage.
4. Be willing to pay 'points'
The optional fees known as "discount points" are a type of upfront payment that can help you bag an enviably low 30-year mortgage rate. One point equals 1% of your loan amount and can cut your rate by as much as one-quarter of 1 percentage point, say from 3.2% down to 2.95%.
The truly jaw-dropping mortgage rates often — though not always — come with points.
You'll need time to break even on the points and other closing costs before you can truly start enjoying the savings from your low mortgage rate. In other words, a refi may not be the right move if you're likely to want to move relatively soon.
Lenders have their own individual pricing structures, so don't make the assumption that a loan with points will always have the lowest rate out there. You might find that another lender offers a loan with a better rate and zero points.
It's another good reason to seek multiple loan offers and look at them side by side — to make certain you get the best mortgage rate you can.
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