How to Make Sure You’re Getting the Best Rate on Your Re-Fi
Now that the election is finally over and a new president is heading to office, it’s anybody’s guess as to how long mortgage interest rates will remain low. Traditionally, election years can have an unexpected effect on the housing market, and if 2020 has taught us anything, it’s to expect the unexpected.
So if you’re thinking about refinancing your home, now might be the time to finally make the leap. But before you do, it’s a good idea to have a better understanding about the different Re-Fi programs out there, because there are several options that you will need to choose from. It also helps to know how to make sure you’re getting the best rate possible. In this guide, you’ll learn more about choosing the best Re-Fi program for you, and how to lock in the lowest rate.
The Different Types of Re-Fi Programs
When you start shopping around for a refinance program, you’re going to need to know three important things:
- Your current loan type
- Your home’s value compared to what’s owed on the loan
- Whether PMI is included in your loan
These three pieces of information will have an impact on which Re-Fi programs are better suited for your unique needs. The following represents the most common refinance programs currently available to most homeowners, and who the ideal candidates are for each option.
#1: Conventional Refinance
A conventional refinance can be obtained by anyone regardless of the type of loan they currently have, although it works best for those with good credit and a decent amount of equity in their homes.
The reason is because if you have at least 20% equity in your home, you won’t be required to carry mortgage insurance, which will help save you money.
#2: FHA Streamline Refinance
If you currently have an FHA mortgage, then an FHA Streamline Refinance might be best for you. Because you are going from one FHA product to another FHA product, you don’t have to worry about dealing with appraisals or providing income documentation. This allows you to refinance quicker and with much less paperwork.
#3: VA Streamline Refinance
The same concept applies if you currently have a VA loan when you choose a VA streamline refinance. A VA Streamline Refinance simply replaces your existing VA loan with another VA loan at a lower rate minus a lot of the documentation requirements.
#4: HARP Refinance
If your loan was originated prior to June 2009 and you have little or no equity in your home yet, then a HARP refinance may be best for you. This type of refinance program is backed by Freddie Mac and Fannie Mae and is usually obtained through local lenders.
#5: Cash-Out Refinance
If you have a lot of equity in your home and you want to refinance to access some of that equity, then you will want a cash-out refinance. With this type of loan, you borrow more than what is currently owed on your home, the difference of which is forwarded to you at closing. The money can be used as you wish, be it for home improvements, to pay medical bills, to reduce other types of debt, to pay for college, or for any other financial need.
Four Tips for Locking in the Best Mortgage Refinance Rate
Of course, the goal of any refinance is to lock in a lower rate, so you can save money every month on your mortgage payment (with the exception of a cash-out refinance because of the larger loan amount). To get the best rate possible, here are four things you’ll want to try to accomplish:
- Improve your credit score – To get a lower rate, the score you want to aim for is 740 (or higher). If your score is between 620 and 740, then a lower rate may be out of reach. In fact, some lenders won’t even approve a Re-Fi for someone with a score below 740. Improve your credit by making all your payments on time, lowering your credit card debt, avoiding applying for new credit, and delaying any major purchases.
- Lowering your loan-to-value (LTV) – The lower your LTV is, the more lenders will work with you to secure a low rate simply because the equity you have in your home makes you less of a risk to lenders. You can reduce your LTV by either paying more toward your mortgage than the minimum or doing home improvements to increase the value of your home.
- Pre-pay closing costs – Closing costs are typically two percent of the loan amount or more. While most borrowers roll the costs into the loan, this won’t get you the best rate. If possible, pay the closing costs upfront. This will help you get a lower rate and a lower monthly payment.
- Pay points – You can also get a lower interest rate by paying points. One point equals one percent of the mortgage amount, so on a $150,000 loan, you would pay $1,500 for one point. Paying points is best suited for long-term mortgages because it can take time to recoup the cost. If you’re not refinancing at a 30-year term, then paying points might not be a good investment.
Before selecting a refinance program, make sure you do your research and speak with a trusted loan officer. Together, you can decide which type of Re-Fi makes the best sense for your current situation and your future.
