A refinance loan replaces your current mortgage loan for better rates and terms or from an adjustable-rate mortgage to a fixed-rate mortgage. The outcome usually equals lower monthly payments. With the coronavirus pandemic still looming, finding ways to save money has become a priority for most people.
How can I save money on a refinance?
If you're considering refinancing your mortgage, you're going to want to use a tool like Credible to compare rates and lenders. In just minutes, you can find your prequalified rates — and you don't even have to leave the comfort of your home.
As you conduct your research, make sure you consider these four ways to save more money by refinancing your mortgage.
- Shop and compare rates and lenders
- Improve credit score/debt-to-income ratio
- Consider a no-closing costs refinance
- Be ready to act immediately or be prepared to pay points
1. Shop and compare rates and lenders
COVID pushed interest rates to record lows. You can also thank the Federal Reserve for dropping the federal funds rate to between 0-0.25%. Such low rates are the driving force behind the surge in refinances — up 89.54% from last quarter and up 297.3% from just one year ago.
Although your refinance rate may be higher than on a new purchase mortgage, you can still come out ahead by swapping out your current home loan with a new one. The only catch is a 0.5% fee, called the Adverse Market Fee, tacked onto refinances over $125,000, beginning this past December.
There’s no way around this fee if you’re only now beginning the refinance process. But you may be exempt if:
- You're refinancing a VA or FHA loan
- You're in the low-income housing refinance market
- You're refinancing a loan that has a balance of $125,000 or less
Shopping around and comparing lenders can save you money. Generally, it won’t hurt your credit score and you could save a bundle on closing costs, fees and the interest rate you’ll pay over time. The best way to compare rates and lenders is to visit Credible and get accurate and transparent pricing from multiple lenders.
2. Improve credit score/debt-to-income ratio
A low credit score can make it more challenging to get a loan. Unfortunately, there is no quick fix to poor credit. However, there are a few ways to raise your score to improve your chances of getting the best mortgage rates.
- Keep your credit card balances low
- Pay off large credit card debt
- Consolidate your high-interest debt into one payment
- Pay your bills on time
- Fix any errors on your credit report
- Ask for a higher credit limit
- Get added as an authorized user
Also, take a look at your debt-to-income ratio (DTI), which is the percentage of your gross monthly income that goes to making your monthly debt payments. A DTI of 36% is best if you want to qualify for a loan. But some lenders will go as high as 43%, according to the Consumer Financial Protection Bureau. (Just another reason to shop around).
To lower your DTI, you can:
- Pay off your loans ahead of schedule
- Pay off higher-interest balances first
- Earn money from a side hustle
- Ask for a raise
If you want to find out how you can save on a home loan based on your current credit score and history, visit Credible. Credible can help you compare mortgage companies and navigate the paperwork whenever you're ready.
3. Consider a no-closing costs mortgage refinance
With a no-closing-cost refinance, you pay no closing costs when you get a new loan. This doesn't mean your lender foots the bill. It only means that these costs are wrapped up into your new loan or swapped out for a higher interest rate.
But when you consider that you’ll pay between 2-3% of your loan balance in closing costs, there are times when a no-closing cost mortgage refinance makes sense and times when it doesn't.
- There's less money out-of-pocket at the time of closing
- You can save money if you plan to move in less than five years
- It makes refinancing in the near future more affordable
- You’ll likely pay a higher interest rate on your refinance
- Your monthly payment may be higher
- You’ll pay more in interest over the life of your loan
If you’re still on the fence about refinancing your mortgage, use an online mortgage refinance calculator to determine your new monthly costs.
4. Be ready to act immediately or be prepared to pay points
Mortgage points are fees paid to your lender at the time of closing to cover the costs to create the loan or buy down the interest rate. As with a no-closing cost refinance, some pros and cons come with paying points. A point usually lowers your interest rate by 0.25%. So, one point would lower a mortgage rate of 3% to 2.75% for the life of your loan.
To get the best deal on mortgage points, visit Credible and select mortgage refinance deals from a wide variety of lenders in just a few minutes.
On a $400,000 mortgage refinance, for instance, one point will cost you 1% of the loan value, or $4,000 for a lower interest rate. If you plan to be in your house for a long time, or if paying points is what qualifies you for the loan, it makes sense.
But act fast. If you refinance your original home loan now, you might save a bundle on your 2020 taxes. When you refinance your mortgage, mortgage interest, real estate taxes, mortgage points and closing costs are all tax-deductible. Plus, refinancing won’t impact your property taxes.
Not only that but with interest rates at all-time lows and no magic ball to see into the future, if you don’t act immediately, you may pay a higher interest rate. Wait, and be prepared to possibly also pay points to buy down your interest rate to current (or near current) rates when you refinance your mortgage.
Find out if you meet the prerequisites to get qualified, and speak with an experienced loan officer to have all of your mortgage refinance questions answered by visiting Credible today.