Key takeaways
- Refinancing your mortgage makes sense if you can reduce the interest rate by one-half to three-quarters of a percentage point.
- Improving your credit score is one way to get the best mortgage refinance rate.
- You can also consider buying discount points or paying your closing costs upfront to whittle the interest rate down.
- Leveraging competing offers and asking for a rate match are other tactics to lower your loan's cost.
Mortgage rates have risen considerably from their all-time lows just a few years ago. Still, depending on when you got your primary mortgage, refinancing could make sense for you.
Ideally, homeowners should consider refinancing if they can shave one-half to three-quarters of a percentage point off a mortgage loan, says Greg McBride, CFA, chief financial analyst for Bankrate. The main aim of a refi, after all, is to lower your monthly mortgage payment and pay less interest over the loan term. So, here are some strategies to score the best refinance rate.
How to get the best refinance rate
Each of these steps can steer you toward a refinance rate that lowers your monthly payments. Keep in mind that approval and your actual rate offer will also depend on your home, location and current mortgage rate trends.
- Improve your credit score
- Compare refinance rates
- Buy points to lower your rate
- Decide which loan term is best
- Choose a fixed interest rate
- Consider the loan amount
- Pay closing costs upfront
1. Improve your credit score
Aside from correcting any errors made to your credit report, “there aren’t many ways to quickly improve your credit score,” says Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. “Applying good credit practices over time is how you improve your score.”
Such good credit practices include making on-time payments, paying down large credit card balances, and applying for new credit judiciously.
Learn more: How to improve your credit score
2. Compare refinance rates
When looking to refinance and save, compare as many mortgage offers as possible. Even a fractional difference can save thousands.
When you compare interest rates, consider the APR, or annual percentage rate, as well, which encompasses annual fees and gives you a better idea of what the true cost is. You may find that the mortgage refi lender with the lowest advertised rate has higher fees and closing costs that actually makes the loan’s APR higher than those of competitors.
If you’re not sure where to start, Bankrate’s online calculator makes comparing current refinancing offers in one place very easy, allowing you to plug in your preferred terms and a particular loan’s fees, to see how much the refi will cost.
3. Buy points to lower your interest rate
With mortgage points, you pay the lender upfront for a lower rate over the life of the loan. One point is equal to 1 percent of the loan amount.
Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit, says homeowners should negotiate loan terms where possible to lock in the most favorable rates and terms. He adds that borrowers with healthier credit scores have more negotiating power than those with average or low scores.
Getting more than one quote is also important. Bankrate’s McBride says lenders offer a variety of programs, ranging from “no points and out-of-pocket costs with a higher rate to those requiring more points upfront by permanently buying down the rate.” Of course, homeowners should avoid depleting their reserves just to buy down the rate. McBride advises buying points only “if you can spare the cash and plan to be in the loan for long enough to reap the benefit of the lower rate.”
4. Determine which loan term is best
While shorter loans, such as a 10-year fixed or 15-year fixed, carry lower rates than longer loans, the tradeoff is much higher payments — and that can be problematic if a job loss occurs.
“Homeowners shouldn’t stretch and saddle themselves to large payments that limit their flexibility just to save half a percentage point or so,” McBride says. “Maintaining financial flexibility is important.”
A longer mortgage term can help keep monthly payments low, but the loan will be costlier to repay because more interest is charged over time, McClary says.
5. Choose a fixed interest rate
Many homeowners will choose a 15- or 30-year loan when they refinance, but they still need to decide between a fixed or a variable interest rate. The value for homeowners is in fixed rates when there is little difference between fixed rates and the initial rate on adjustable mortgages, McBride says.
“Go for the permanent payment affordability of the fixed-rate loan,” McBride says. A fixed rate can also help consumers budget more easily.
It makes sense to get a fixed-rate loan if you plan to stay in your home for a long time, McClary says. “If it’s possible that rates could drop in the near future or the property could sell before the loan is repaid, a variable-rate loan could be the way to go.”
With a variable or adjustable-rate mortgage (ARM), the interest rate changes at predetermined intervals based on the market and a margin determined by the lender. So, while your interest rate can decrease at those times, it can also increase substantially — making a fixed-rate loan generally less risky.
6. Consider the loan amount
The more you borrow for a mortgage, the higher your monthly payment will be. A homeowner who gets a mortgage on a $250,000 home with a 4 percent interest rate for 30 years and a 10 percent down payment pays $1,195 a month, while a 20 percent down payment brings that down to $955, Boies says.
“You will want to consider the long-term savings over the life of the loan,” he adds.
While it is easy to get confused when presented with all the options for refinancing a mortgage, there are many resources available for help.“A HUD-approved nonprofit agency affiliated with the National Foundation for Credit Counseling can offer some expert advice and direction for making the right decision,” McClary says.
Borrowers need to fully understand the terms of their mortgage loan, as well. Utilize online calculators to help make decisions and find a mortgage that best suits your needs, Boies says.
7. Pay closing costs upfront
The closing costs you’ll pay varies by lender and by location, but it’s generally between 3 percent and 6 percent of the home’s current value or market price. So, if you want to refinance a $325,000 home loan, you’ll typically pay $9,750 to $19,500 in closing costs. You may be able to negotiate these expenses to some extent.
Some lenders offer to roll closing costs into the loan, but there’s a catch. You’ll likely have to pay a higher interest rate to secure a no-closing-cost refinance loan, which means your mortgage payment will be higher. Furthermore, you’ll pay the lender more in interest over the loan term.
To illustrate, the lender could offer to refinance your $325,000 home loan with a 30-year term at 4 percent APR, charging you $13,000 in closing costs. Or you could get a no-closing-cost refinance with the same loan term, but with a 4.5 percent APR.
If you go with the refinance that has the lower interest rate, you’ll pay $1,551.60 per month and $233,575.90 in interest for the duration of the loan. But if you opt for zero closing costs, your monthly mortgage payment will increase to $1,646.73, and you’ll pay a total of $267,821.81 in interest.
FAQ about getting the best refinance rate
Since mortgage rates aren’t set in stone, it’s often worth the effort to negotiate. Start by getting estimates from three to five lenders and compare the interest rates, APRs, closing costs/fees and other expenses. Then, use the offers as leverage to negotiate your rate and costs.
Say lender A has lower costs, but lender B has a lower interest rate. You could tell lender A you received a better rate from a different lender and ask them to match (or better yet, beat) lender B’s rate. Lender A might be willing to adjust the interest rate if it means getting your business.
Today’s refinance rates are hovering between 6.4 and 6.8 percent for fixed-rate loans; adjustable rates run around 6.2 percent. The national average 30-year fixed refinance APR is just under 7 percent, while the average 15-year fixed refinance APR is 6.5 percent.
Consider refinancing if rates are lower than your current mortgage or your adjustable-rate mortgage (ARM) is resetting upward. You might also consider refinancing if your financial situation has improved and you can afford to pay off the loan faster with a shorter term — or qualify for a lower rate than you originally received.
Bottom line on shopping for a mortgage refinance
You can score the best refinance rate by cleaning up your credit before you start applying, and by paying closing costs upfront once you get a loan.
But the main point: Shop around. Taking the first refinancing offer you find is rarely the best idea. Bankrate’s refinance rate table offers the opportunity to compare rates, get a sense of trends, and shop for a mortgage refinance online before formally applying with a lender. So if you see a good deal, you can strike while the iron is hot.
