How to Get the Best Refinance Rates
Refinancing can help you save money, especially if you get a lower interest rate. Low rates minimize the amount you spend on interest over the life of your loan, plus you can secure a lower monthly payment. To get the best rates, prepare for the application process, and then shop around. With several offers in-hand, you can evaluate the pros and cons of each loan and choose the best one.
Interest rates are quite low, historically speaking: In the 1980s, double-digit interest rates were common, with rates rising above 17%, at times. Now, you can potentially qualify for a loan with a rate in the low single digits. As a result, you may have an opportunity to lock in a low rate for the long term.
Surveys and advertisements only provide a ballpark idea of what’s available. The only way to know what rates are available to you is to submit applications. Doing so allows lenders to provide an accurate quote based on your credit, income, and other factors.
Shop Around for the Best Rates
Sometimes shopping is fun, but that’s not the case when it comes to mortgages. As tedious as it may be, it’s smart to get multiple quotes from different sources when shopping for a loan. Ask each lender for a loan estimate, which is an official document detailing your closing costs and other loan features.
Three quotes should be sufficient. Start with your existing lender, visit a local bank or credit union, and check with independent loan originators. Yes, it’s a pain to submit information to each of them, but you can potentially save thousands of dollars in the coming years. You'll learn a lot during the process, and you'll eventually understand which lender is your best option for refinancing.
The chart below illustrates the mortgage averages of 5/1 ARMs,15-year fixed-rate mortgages, and 30-year fixed-rate mortgages from 2005 through today.
Prepare Your Finances
To qualify for the best rates available, take steps to improve your borrower profile. You can begin this process before you even fill out an application.
Manage Your Credit
Put your best foot forward by keeping your credit scores as high as possible. A better score may make it easier to qualify for the best rates.
- Get a free credit report and review your credit history.
- Pay down balances to avoid the appearance that you’re maxed out.
- Get current on any loans you’re behind on.
- Fix any errors that may prevent you from getting approved or may lead to higher rates.
Minimize Your Debt
- Pay down balances on loans—including credit cards—and pay off debts like auto loans and personal loans, if possible. Doing so reduces the total monthly payments you owe to creditors. As a result, you improve your debt-to-income ratio, making you a more attractive borrower.
- Avoid major purchases. A new auto loan will add to your monthly obligations. Assuming your mortgage loan is one of your biggest debts, getting the best rate possible on this loan should be a priority.
Keep credit card balances low, even if you pay them off completely every month. Depending on when lenders pull your credit, a high balance can hurt your chances of getting the best rate.
Maximize Your Home Equity
It’s possible to refinance with equity in the single-digits, and it might even be possible to refinance with negative equity. But you have more options available with a healthy amount of equity. If you don’t already have 20% in equity, getting to that level should make it easier to refinance. As a bonus, you won’t need to pay for mortgage insurance. If you have cash available, ask your lender how paying down your mortgage might help you save money.
How to Get the Lowest Rates
Your credit scores and ratios play an important role in the offers you receive. But if getting the best interest rate is your primary goal, you can favor loan options that minimize your interest costs.
Short-Term Loans Have Low Rates
The classic 30-year fixed-rate mortgage keeps monthly payments low. But shorter-term loans typically have lower rates and lifetime interest costs. Yes, you have a higher monthly payment, but you still come out ahead by paying off debt faster.
- 15-year loans: Historical data shows that 15-year mortgages consistently have lower rates than 30-year loans. The combination of a shorter repayment period and a lower rate results in substantial interest savings over your lifetime.
- Adjustable-rate mortgages (ARMs): Sometimes, you can get even lower refinance rates with an ARM. But if rates rise, your monthly payment can increase as well, potentially causing financial hardship. Plus, you may end up spending more on interest than you expected.
Explore Government Programs
Interest rates are tied to risk, and less risk for lenders translates into a lower rate for you. Government-backed loan programs protect lenders, so they can be especially helpful if you have issues in your credit history or minimal equity in your property. You might not get the lowest interest rates when you refinance with a government loan, but it should be easier to get approved, and the rate might be better than what’s available with conventional loans. Potential sources of funding include FHA loans, VA loans, and USDA loans.
Pay Your Own Closing Costs
It’s tempting to choose loans with the lowest closing costs (or "no closing costs”). But those loans aren’t free—lenders charge higher rates or add closing costs to your loan balance if you don’t pay closing costs yourself. The result? You spend more on interest in the years to come, and you have a higher monthly payment. You can even pay optional discount points to lower your rate further—ask your lender what your options are.
The longer you plan to keep your loan, the more sense it makes to pay for closing costs and points out-of-pocket.
Freddie Mac. "30-Year Fixed-Rate Mortgages Since 1971." Accessed Apr. 2, 2020
Consumer Financial Protection Bureau. "Know Before You Owe: Loan Estimate." Accessed Apr. 2, 2020
Consumer Financial Protection Bureau. "What Is a Credit Score?" Accessed Apr. 3, 2020
Federal Trade Commission. "Debt-To-Income Calculator Tool." Page 1-3. Accessed Apr. 3, 2020
Interest Rate Reduction Refinance Loan (IRRRL). "Benefits.gov." Accessed Apr. 3, 2020
U.S. Department of Housing and Urban Development. "Handbook 4000.1." Page 431. Accessed Apr. 3, 2020
Consumer Financial Protection Bureau. "How to Decide How Much to Spend on Your Down Payment." Accessed Apr. 3, 2020
Consumer Financial Protection Bureau. "Explore Interest Rates." Accessed Apr. 3, 2020
Freddie Mac. "15-Year Fixed-Rate Mortgages Since 1991." Accessed Apr. 3, 2020
Freddie Mac. "5-Year Adjustable-Rate Mortgages (ARMs) Since 2005." Accessed Apr. 3, 2020
The Federal Reserve Board of Governors. "Consumer Handbook on Adjustable-Rate Mortgages." Page 23. Accessed Apr. 3, 2020
Consumer Financial Protection Bureau. "Is There Such a Thing as a No-Cost or No-Closing Loan or Refinancing?" Accessed Apr. 3, 2020