A. Follow the 12 steps below and you will get the lowest rate mortgage rates!
No. 1: Raise your credit score
Typically, a credit score of 740 or higher puts you in the best tier for a conventional loan program. Most lenders require a minimum credit score of 620 to 640, but you'll pay a higher mortgage rate for conventional loans unless your score is 740 or above. However, some portfolio lenders set their own guidelines.
No. 2: Lower your debt
A good rule of thumb is to make sure your debt-to-income ratio is no more than 36%, and even lower is better. Even if you have a high credit score, you may be denied a refinance altogether or subjected to higher interest rates if your DTI ratio is too high.
No. 3: Increase your home equity
Your credit scores and the loan-to-value ratio of your property could have a much bigger impact on your refinance rate than a slight shift in average mortgage rates. Both a lower-than-average credit score and a high loan-to-value can lead to a more expensive interest rate.
If you are underwater on your mortgage, a Home Affordable Refinance Program (HARP) loan may be your best option.
No. 4: Organize your financial documentation
You should get your credit reports from all three bureaus to make sure there are no mistakes that need correcting before you apply for a refinance.
A refinance application typically requires two years of tax returns with W2s, two recent pay stubs, and your two most recent bank and investment statements.
Gathering these materials ahead of time can expedite the loan process and prevent you from paying extra for an extension of your rate lock.
No. 5: Save cash for closing costs
Closing costs average about 2% of the loan amount. You can pay cash for the closing costs or, if you have enough equity, you can roll these costs into your new loan. Another option that some lenders offer is to pay a higher interest rate for a lender credit to cover those costs.
Shop smart for your refinance
Once your preparations are complete, you can begin to shop around for the refinance that works best for you.
No. 6: Start online
Start online with a refinance calculator that estimates your monthly payments at various loan terms.
A shorter term loan will have a lower interest rate than a 30-year fixed-rate loan, but the payment will be higher because you're paying it off faster. It's important to decide what payment you're comfortable making before you see a lender, because that payment could be much less than the payment you qualify for.
No. 7: Decide on a loan term
The loan term you choose needs to be made in the context of your other financial obligations and plans. If you have $30,000 in credit card debt and no savings for college, you may want to go for a 30-year loan to keep the payments as low as possible. Someone else may want a shorter term to build equity faster while another borrower might want a longer loan so they can keep their tax deduction as long as possible.
No. 8: Talk to multiple lenders
Once you've decided on your loan term, it's time to research loan products available from a credit union, a regional or community bank, a direct lender and a national bank to find out what special programs they offer.
Many lenders offer "portfolio loans" - ones they keep in-house instead of selling on the secondary market. They can be more flexible with those loans and offer special promotions.
Instead of choosing a lender solely based on current mortgage rates, you need to find a lender you can trust.
No. 9: Review all your loan options
Lenders can discuss various loan products when you interview them. There's a broad product mix of conventional financing, government-backed programs like FHA loans and special refinancing programs through the Making Home Affordable program. A good lender can present the pros and cons of each of these programs in the context of your individual finances.
No. 10: Decide how you will finance your refinance
You'll also need to decide how to pay for your refinance. Closing costs and lender fees can be paid at closing, wrapped into your loan balance or you can opt for a "no-cost" refinance. A no-cost refinance means that your lender will pay the fees and you'll pay a slightly higher interest rate of one-eighth to one-fourth percent.
HSH.com's "Tri-Refi" refinance calculator can help you decide the best way to finance your refinance.
No. 11: Compare mortgage rates and fees
Advertised mortgage rates are sometimes based on paying points, so you need to make sure you compare loans with zero points or the same number of points.
It's important to shop for the same loan on the same day to get a true comparison of mortgage rates, because mortgage rates change every day. You need to explain to each loan officer all the criteria for your refinance, not just ask 'what's today's rate on a $200,000 loan? You should also ask about loan processing times.
Shopping by APR can be confusing, since different lender fees and policies can affect the outcome. It is possible for two loans to have identical rates and fees and different APRs. Conversely, two loans could have the same APR but different interest rates. Because of this, it is usually better for you to focus instead on the two most important components of APR: interest rate and fees.
The most important component of your refinance will generally be the interest rate, so you'll of course want to pay attention to that. Fees and closing costs matter, but whether you want or need to pay them will depend upon your situation. There are times when paying costs to obtain the lowest possible rate can make sense and times when it does not.
No. 12: Know when to lock in your rate
Once you've finalized your loan decision you should consult your lender about when to lock in your rate.
Processing times for different lenders can range from 30 to 45 days to more than 90 days. Typically, lenders will do a 30- or 45-day rate lock, so you should be consulting with your lender to determine the appropriate day to lock your loan. If you have to extend the lock or relock your loan, that will likely cost you more money.
While shopping around for a refinance may take a little longer than refinancing with your current lender, the rewards can last as long as your loan.