Getting a good mortgage rate is dependent on various factors. A lower refinancing rate equals to thousands of dollars in savings as a homeowner. The mortgage refinancing rates are subject to market vulnerabilities. Due to the financial constraints, the interest rates have significantly reduced due to monetary policies placed by central banks to stimulate spending and avert a possible economic shutdown.
If you are seeking to refinance your mortgage and get the best rates, then this is a good time to do so. To get the best refinance rates, you must be well-deserving and this article aims to equip you on how to get the best rates and what criteria lenders use.
What is mortgage refinancing?
Mortgage refinancing refers to the replacement of an existing mortgage contract between an individual and a creditor. The debtor will choose to revise interest rates, payment schedules, and terms of the previous agreement. You should consider refinancing your mortgage when the interest environment has substantially changed, such as after the COVID-19 pandemic, hence ensuring you make huge savings on mortgage payments.
How refinancing works?
Mortgage refinancing is often considered after evaluation of an individual’s credit terms and status. The current economic environment spiked by COVID-19 has substantially reduced interest rates on consumer loans, such as mortgages. This is an opportune time to consider approaching your creditor for mortgage refinancing. Monetary policies placed by national governments to stimulate consumer spending have substantially reduced interest rates.
How to Win the Best Mortgage Rates?
- Improve your credit score
An improved credit score is one of the core factors in accessing the best rates on mortgage refinancing. Your creditor evaluates your credit profile and status prior to a mortgage refinance agreement. Improving your credit score takes time and that is why you should start now by paying off a huge sum of your credit card bills. This gradually improves your debt to available credit ratio, giving you a high chance of saving thousands of dollars in mortgage repayments. To stand a chance of getting the best rates on mortgage refinancing, it is advisable to use less than 30% of your available credit on your credit card. It is important to understand that they are no quick fixes to improving your credit score but upholding good credit practices over time consistently.
- Understand the type of loan that suits you best
Financial flexibility is a crucial factor to ponder on when determining the type of mortgage refinance loan you want to take up. A 10 to 15-year fixed refinance plan will have the homeowner paying higher installments as compared to a 30-year agreement. The former can be strenuous and problematic in cases of a sudden job loss.
Longer mortgage refinance plans keep installments smaller and manageable. However, such may be costly in the long run.
The 2 best types of refinance loans to consider
- Rate and term refinancing
This is the most common mortgage refinancing loan, where the original loan is paid off and a new one with cheaper interest rates is taken up. Homeowners are advised to consider this option as they will make huge savings on the overall mortgage cost.
- Consolidation refinancing
It is an effective way to get good rates when you want to refinance your mortgage. As a homeowner, you can take up a new loan that has the lowest interests cut across all creditors, pay off your existing loan, and remain with a substantially lower interest payment on the principal.
- Consider refinancing with fixed loans
A fixed loan will help you budget more easily as a homeowner. Besides, fixed loans offer affordability in paying off your mortgage. Fixed loans will ensure you get value rather than adjustable loans that are subject to market vulnerabilities and fluctuations. When refinancing rates are low and can foreseeably increase in the future, then it is advantageous to go with the fixed loans.
- Settle for the right loan amount
The more you borrow, the more you pay in monthly installments. Therefore, it is imperative to understand the terms of your mortgage loan. You can seek help from mortgage refinance rates online calculators to give you a rough estimate of your installments.
- Buy points to reduce the refinance interest rates
As a homeowner or an aspiring one, you ought to do a thorough due diligence on rates offered by lenders to settle on the best mortgage refinance rates by asking for different quotes. Some lenders allow homeowners to buy points to lower their interest rates. One point is equal to 1% of the interest rates. This means that you pay the lender upfront for a lower rate over the life of the loan. In most instances, those with robust credit scores have more negotiating power for lower mortgage refinancing rates. Ensure that you meet all of the mortgage refinancing guidelines to avoid paying more than what you have to borrow. In case you are short on cash, then do not worry about depleting your cash reserves to buy down the rate. You can consider cheaper mortgage refinancing loans.
- Cash reserves
Cash reserves for mortgage refinancing are measured with the number of months’ worth of house payments that you have saved in cash. Ensure that you are saving enough, whether in the bank or money markets, to have a higher negotiating power when negotiating a mortgage refinance. Higher risk mortgages tend to require higher amounts in your cash reserves. Essentially, to win the best mortgage refinancing rates, your cash reserves must be adequate after closing a mortgage deal to cover the mortgage payments for 60 days. It is worth to note that savings for your retirement plan are not considered as cash reserves for a mortgage refinancing. This is because such a plan attracts taxes and penalties.
- Do comparison shopping
The minute you have everything in check from your credit score to cash reserves, then it is time to do comparison shopping to get the best possible refinancing rates. Fortunately, it is very easy to perform as they are numerous and trusted resources on the internet.