As mortgage rates keep sinking to new all-time lows, homeowners keep on refinancing — and mowing down their monthly housing costs.
It’s a smart defensive move for households being squeezed again as the U.S. deals with its worst wave of COVID-19 yet, which is leading to new lockdowns and layoffs.
Note that different lenders can provide widely different refinance mortgage rates, particularly since a long-awaited 0.5% refinance fee finally took effect on Dec. 1. Some lenders are passing the fee onto consumers in the form of higher rates, though it appears others are not.
If you’re determined to refinance and save, how do you score one of those historically low rates — and not settle for something not quite as good?
Here are six strategies for getting the best refi rate you possibly can.
1. Make certain you’re a good refinance candidate
Is a refi really worth your while? The mortgage technology and data provider Black Knight said recently that 19.4 million homeowners who can lower their mortgage rates by at least three-quarters of one percentage point (0.75) would shave an average $309 off their monthly house payments.
It could make financial sense to refinance if your current mortgage is fairly fresh — say from early 2020. At that time, 30-year mortgage rates were averaging around 3.75%.
Rates last week fell to an astonishing record low, with 30-year fixed-rate mortgages averaging just 2.71%, says mortgage company Freddie Mac. It was the 14th time rates hit a new low since March.
Note that the best rates go to borrowers whose credit scores are exceptional (800 or above) or very good (740 to 799). If you don’t know your credit score, you can easily check it for free.
When you apply for your refi loan, you’ll also need to show income — which, for some, might be challenging during these tough times.
2. Shop around to find your best rate
To get the best deal on your refinance, you’ll want to compare rates from several lenders — and not grab the very first loan you see.
Homeowners who shop around for their refi loans save an average of around $163 a month, or $1,953 a year, versus those who don’t, according to a LendingTree study from early 2020.
The savings can be truly eye-popping in high-price markets.
Borrowers in San Francisco who don’t shop around pay an average of more than $66,000 in extra interest charges over the life of a mortgage. In Boston, you’ll pay about $59,000 more, according to the study.
Good comparison shopping skills come in handy when it’s time to renew your homeowners insurance, too. Use a site that will help you gather quotes from lots of insurers, so you can review them side by side and make sure you get the best deal on your coverage.
3. Be ready to act fast
The coronavirus crisis has made financial markets volatile, and mortgage rates have become moving targets.
“Loan packages can get sent out and by the time they get returned, the rate may no longer be available,” says Richard Pisnoy, a principal with Silver Fin Capital Group, a mortgage broker in Great Neck, New York.
“It is extremely important to be able to move quickly in this environment when locking a rate,” Pisnoy adds.
That means working ahead of time to gather up all of the usual, necessary documentation — including pay stubs, bank statements and tax returns — so you’ll have that stuff ready to present to a lender.
4. Prepare to pay closing costs
As with any mortgage, a refinance loan comes with closing costs. And, to land the lowest mortgage rate you can get, you may want to pay those costs upfront.
Typically, you’ll be charged fees equal to 2% to 5% of your loan amount. Including taxes, the average for mortgage closing costs in the U.S. is $5,749, according to the latest estimate from real estate data firm ClosingCorp.
Don’t have the cash to pay closing costs? You could do what’s called a no-closing-cost mortgage and have your lender cover some of the fees for you — but the downside is that you’ll be given a higher interest rate.
Another option is to roll the closing costs into your loan. But you’ll wind up paying interest on those costs, so this approach can raise your monthly payment and your lifetime interest tab.
5. Have realistic expectations
People in the mortgage industry say some homeowners who’ve heard the Federal Reserve cut interest rates down to about zero to shore up the economy think they can get mortgages at 0%.
While home loans are being offered at the lowest rates in history, you won’t find one at 0%.
The Fed doesn’t have a direct impact on long-term, fixed mortgage rates, but on short-term and variable-rate loan products, such as credit cards and home equity lines or credit (HELOCs).
Even so, rates on those don’t match the Fed’s benchmark rate either. Instead, they’re tied to the prime rate, which is set by banks and moves up and down in sync with the Fed’s federal funds rate.
6. Be willing to pay ‘points’
Here’s one more piece of advice to help you snare the lowest refinance rate out there: When you take out your loan, consider paying “discount points,” which are fees amounting to a percentage of your mortgage amount. One point equals 1% of what you’re borrowing.
Paying points reduces your mortgage rate, and it’s a strategy that in recent years has become even more effective, Pisnoy says.
“It seems that paying points may be able to go a little further than it used to,” he says. “Instead of lowering a rate by 0.25 of a percentage point when paying one point, maybe it will lower the rate even more.”
When you pay points, you “buy down” your mortgage rate — which also will lower your monthly mortgage payment.
One of America’s largest lenders is currently advertising a 30-year fixed-rate mortgage as low as 1.999%, but with estimated “finance charges” of $11,000. Presumably, those charges include points to help you bag your low rate.