Interest rates are low – that is probably something you hear every other day on the news. But how do you get those low rates? How do you even know if the lender offered you the lowest rate? What if there is more money on the table? Here are a few concrete strategies to ensure that you get the great refinance rate.
Prepare Ahead of Time
Don’t just decide one day that you want to refinance and start applying. Instead, plan ahead as this is the best way to ensure that you get the best rate. Sure, your credit might be good and your debt ratio minimal, but there are other factors lenders evaluate. In the end, they look at – not just one piece of the puzzle, but the overall picture. This means that your great credit might not have as much impact as you thought if your loan-to-value ratio is sky high or you changed jobs three times in the last year.
Check your Credit Score
The very first thing you should do when you decide to refinance is to check your credit score. You have the ability to receive one free credit report from each credit bureau every year. This means that you can receive up to 3 free credit reports. Spread out the time in between when you pull each report and go over them with a fine-toothed comb. Look for incorrect information, such as late payments that you know that were on time, collections that you paid off and accounts you know you closed that remain open. Talk to the credit bureau right away about correcting the erroneous information. This usually requires you to provide adequate proof of the incorrect information, but it can have a great impact on your credit score.
If all of your information is correct, yet you have a lower than anticipated credit score, start working on it. Look at how much of your available credit you have outstanding. If your credit utilization rates are too high, it will affect your score tremendously. What you can do right now, though, is start paying those balances down. This is something that has an immediate effect on your score.
If you have late payments, start paying your bills on time and stop applying for new credit. After a few months of these regular habits, you will start to see an improvement in your credit score. Remember, the higher your score, the better off you will be when you apply for a refinance.
Lower your Loan-to-Value Ratio
Just as important as your credit score is your loan-to-value ratio. The closer you are to the maximum for the program, the higher risk you pose. Generally, lenders want to see your LTV lower than 80%. This is just a safe number for them because it means you have 20% invested in the home. Since 20% is a significant number, the chances of you walking away from your home if you are unable to make payments is very slim. Don’t stop at 80%, though, the more equity you have in the home, the better the lender views your situation. This translates into a great refinance rate if everything else falls into place.
Have Plenty of Assets
Your lender might not ask to see proof of reserves for your refinance, but they will want to see proof of assets if you plan to pay your closing costs on your own. In fact, paying your own closing costs can help you secure a better interest rate. If you do not have the funds to pay those costs, the lender either has to roll them into the loan if the program allows it or pay the costs themselves. Either way, your LTV increases with a higher loan amount or the lender makes less money off of you by paying the closing costs for you. Both situations pose a higher risk to the lender, which means a higher interest rate. In the case of the higher LTV, the lender increases the interest rate in order to make up for the risky LTV and in the case of the lender paid closing costs, the lender needs to make its money back!
If you plan to pay your own closing costs, make sure you have asset statements ready for the lender. They need to determine that the funds you use are your own funds and that you did not just stuff your account with someone else’s money. They will source any large deposits or any deposits that look questionable and cannot be tied into your salary. The cleaner your asset statement looks, the better off you will be in the long run.
Pay Points Up Front for a Great Refinance Rate
Going back to the point of having assets to pay your closing costs; if you have enough money to pay for discount points, you can buy your interest rate down. If you plan on staying in the home for the entire term of the loan, it might make sense to pay the points. One point equals 1% of the loan amount. Every lender assigns a different discount to each point, so when you shop around ask the lender how much it would cost you to buy the rate down to a rate that will provide you with the lowest possible monthly payment.
In order to pay the points, just like your closing costs, you will have to verify your assets. You need to show the lender that the money you saved up is your money from your employment or the sale of an asset, for example. Be ready to show proof of something like the sale of an asset with a paper trail to satisfy the lender’s requirements.
Compare Apples to Apples
When you shop with different lenders, do not assume that every loan is created equal. You might compare two completely different loans and make the wrong choice. Look closely at the Good Faith Estimate to determine the number of points the lender will charge you as well as the other closing costs. You should compare the bottom line numbers when deciding which loan is right for you. Do not focus strictly on the interest rate or the payment. Instead, look at how much the loan costs over the life of the loan and opt for the one that will cost you the least while remaining the most affordable. If you find that one lender offers you a better deal, do not be afraid to let the other lender know. You never know when one mortgage company will match another company’s offer.
Securing a great refinance rate is not as hard as it seems. You simply have to make sure that you get all of your ducks in a row before you apply and shop around. Some lenders look at certain situations as too risky, while others will welcome them with open arms. Shopping around with several lenders at a time is okay as long as you do it within a short period, this way your credit does fall because of too many inquiries. In the end, your legwork will pay off as you secure the lowest interest rate possible for your refinance.
