You want to refinance to save money each month. Now may be a good time as interest rates continue to stay low. But just because rates are low doesn’t mean you’ll get the lowest rate available. You have to make sure your loan application is as attractive as possible. In other words, you need to show lenders that you are a borrower worth trusting.
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So what can you do to get the best rate? Keep reading to find out.
Maximize Your Credit Score
Just like when you bought your home, your credit score is an important factor. The higher your credit score is, the lower the interest rate a lender will be willing to give you.
Your credit score lets lenders know how well you manage your finances. Do you pay your bills on time? Do you pay your credit card bills off in full or do you keep a balance? Do you have a good balance of revolving and installment debt? These are all factors that affect your credit score.
If you want to maximize your credit score, try the following:
- Make sure all of your accounts are current
- Don’t open any new accounts in the six months leading up to your loan application
- Make sure your revolving debt balances are less than 30% of your total credit balance
- Have a good mix of installment and revolving debt
- Don’t close any old accounts
These habits will help your credit score increase, which will show a lender that you are financially responsible.
Keep Your Debt Ratio Low
Your debt ratio also lets lenders know how well you can handle your bills. If you are over-extended, meaning that you have a high amount of debt outstanding compared to your gross monthly income, you are considered high risk. Lenders won’t give you a lower interest rate if you pose a risk of default.
Take the time to see which debts you can pay off in full. For example, do you carry a credit card balance, but you really could pay it off in full? It’s best if you pay it off and lower your debt ratio. A high debt ratio looks worse to a lender than not having any liquid assets on hand.
If you do have debts that aren’t going anywhere, make sure that your total debt ratio (your mortgage + all other debts) don’t exceed 36% of your gross monthly income. If they do, you’ll be looking at government-backed mortgages, such as the FHA or USDA loans. While these aren’t bad choices, you will pay mortgage insurance for these loans, which adds to your monthly fees.
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Show a Timely Mortgage Payment History
One debt your potential lender will pay close attention is your mortgage payment history. They want to know that you paid your mortgage on time every month for at least the last 12 months. If you have even one 30-day late payment in there, the lender will assume you are a high risk of default and they won’t offer you the lowest interest rate.
Keep Your LTV Low
The more equity you have in the home, the lower your risk of default, at least in the lender’s eyes. Lenders assume that you will do what it takes to make your mortgage payment if you have a lot of equity in the home. If you go into default and the lender forecloses on you, the equity you had is completely gone.
If you know your home appreciated, you’ll automatically have more equity in the home. If you paid a decent amount of your principal down in addition to the home’s appreciation, you’ll have even more equity. If you can show that you owe less than 80% of the home’s value, you’ll put yourself in a good position to get a low interest rate.
Shop Around
The final trick is to shop around with different lenders. Each lender will likely quote you something different. Don’t make the mistake of taking the first quote you receive. You don’t even have to get a quote from your current lender if you don’t want to – you are free to refinance with any lender that is licensed to operate in your state.
We recommend that you get at least three quotes from different lenders. This way you can compare the offers to see which one suits your needs the most. You may find one lender offers a low interest rate, but charges excessive fees. Another lender may charge a slightly higher interest rate, but they won’t charge you nearly as much in closing costs.
You have to look at the situations and decide which one suits your financial needs the most.
Getting the lowest interest rate on your refinance is possible, as long as you put in the work. You want to show potential lenders that you are a good risk. Lenders reward borrowers that show a low risk of default by giving them the low interest rates that are available.
