Compare the Best Refinance Rates

When mortgage rates fall, homeowners may start crunching the numbers to see if refinancing makes sense. By getting a new mortgage with a lower interest rate, refinancing could potentially save you money in the long term. Fortunately, there are plenty of things you can do to help make this happen.

Here are 11 ways to help get the best refinance rates:

1. Scan your credit report for errors

It pays to know what’s in your credit reports before applying for a mortgage refinance. In a study commissioned by the Federal Trade Commission, a quarter of consumers had errors on their credit reports that might affect their credit scores — and some of those errors could result in less favorable loan terms.

To check your reports, head to AnnualCreditReport.com, where you can get a free copy once a year from each of the credit bureaus. Make sure to scan your credit report for:

• Incorrect information, such as closed accounts reported as open.
• Duplications, such as one account listed twice.
• Signs of identity theft, such as accounts you don’t recognize.

Find out: What Documents Do You Need to Refinance Your Mortgage? A Checklist

2. Boost your credit score

Most lenders pull your credit history during the refinance process, so it’s a good idea to check your credit score to see if it needs work. Generally, most loans require a score of around 620, but a 740 or higher will result in much more competitive rates. Here’s a glance at how your credit score impacts your interest rate and the long-term costs of your loan:

If you need to improve your credit score, follow these tips:

• Pay all your bills on time. Set up reminders or automatic payments to help.
• Pay down some or all of your debt. If you need to increase your income, consider getting a side hustle.
• Don’t close any credit cards. This will help you maintain a long credit history.
• Avoid hard inquiries. Generally, try not to apply for any credit before refinancing your home. Applying for new credit can generate a hard inquiry and affect your credit score.

3. Reduce your credit utilization ratio

Your credit utilization ratio is a measurement of how much credit you’re using compared to the amount of credit you have available. Lowering your credit utilization ratio before applying for a refinance loan may help you qualify for lower refinance rates. A good target ratio to aim for is 30% or less.

For example: Let’s say you have a credit card with a balance of $800 and a credit limit of $3,000. To calculate your credit utilization, divide the balance by your credit limit:

$800 / $3,000 = 0.266 or about 27%

Paying down debt will naturally lower your credit utilization. But you can also ask your card issuer to increase your credit limit, which can help lower your credit utilization ratio.

4. Cut down on your monthly debt

Your debt-to-income ratio, or DTI, is another factor your lender might look at during the refinance process. This number is expressed as a percentage and measures how much of your income goes toward debt payments every month. A lower DTI can help you qualify for a great refinance rate or make up for a less favorable credit score.

Mortgage lenders calculate two types of DTI. Your front-end DTI ratio only includes your housing costs, while your back-end ratio includes all debts.

For example: Let’s say you’re considering a mortgage payment of $1,200. You have a $300 student loan payment and a $250 car payment, and your gross income is $5,000. Here’s how you would calculate your DTI:

• Back-end ratio: ($1,200 + $300 + $250) / $5,000 = 0.35 or 35%
• Front-end ratio: $1,200 / $5,000 = 0.24 or 24%

While most lenders only require a DTI of 43%, one under 36% may help you get you a better rate.

5. Save up to pay closing costs upfront

Before refinancing, consider saving up for the closing costs. These typically reach $5,000 on average and may include:

• Government recording costs
• Appraisal fees
• Credit report fees
• Lender origination fees
• Title services
• Tax service fees
• Survey fees
• Attorney fees
• Underwriting fees

Some lenders offer loans called no-closing-cost refinances, which can save you this upfront charge. Typically, though, they’ll bundle closing costs into your loan or make up for it with a higher interest rate, so you’ll have to check whether you still come out ahead in the deal.

6. Compare multiple lenders to find the best refinance rates

Every lender has a different way of setting interest rates, so it pays to shop around. According to a Freddie Mac survey, borrowers save an average of $3,000 over the life of their mortgage by getting five rate quotes.

When looking at offers, be sure to compare both the interest rate and the annual percentage rate with each lender. The APR is a better indicator of the total cost of the loan because it includes the interest rate along with any fees the lender charges.

7. Set a limit on your loan amount

With some refinance loans, such as cash-out refinances, you take out a loan amount that’s higher than your current mortgage balance and pocket the difference. But this generally leads to a higher interest rate because you’re increasing your loan-to-value ratio (LTV).

An LTV ratio measures how much equity you have in your home compared to your mortgage balance.

To calculate your LTV ratio, divide the mortgage balance by the home’s market value, and then multiply by 100 to get a percentage.

For example: Let’s say your mortgage balance is $200,000 and your home is worth $300,000:

$200,000 / $300,000 = 0.66

0.66 x 100 = 66% LTV

If you decide to do a cash-out refinance, for $240,000, for example, then your LTV increases to 80%. Setting a limit on the loan amount may help you get a good refinance rate.

8. Get a fixed rate for stable savings

One part of refinancing is deciding between a fixed interest rate or an adjustable-rate mortgage (ARM). A fixed-rate won’t change throughout the life of the loan. An ARM, on the other hand, starts with a fixed interest rate for a set period, typically three, five, seven, or 10 years. Once that period ends, the interest rate can move up or down for the remainder of the loan — so there’s a chance your monthly payments will increase in the future.

Refinancing into a fixed-rate loan will make budgeting easier and generally lead to more reliable long-term savings.

9. Opt for a shorter loan term

Refinancing to a shorter loan term (e.g., from a 30-year to a 15-year mortgage) typically helps you score a lower interest rate and save more interest over the life of the loan.

But because you’re paying off the loan in a shorter time frame, your payments will increase. Before refinancing into a shorter loan term, make sure you can handle the higher payments.

10. Buy mortgage points to lower your interest

A mortgage point is an optional fee you can pay the lender to lower your interest rate. Typically, 1 point equals 1% of the loan amount, and the exact amount you save with each point varies by lender. The key benefit is that you keep the lower rate for the life of the loan.

But before refinancing, you’ll need to see if the savings are worth the fee.

For example: If you pay $2,000 for 1 point on a $200,000 loan, and you’re saving $100 a month in the refinance, it will take 20 months to recoup the fee. That could be a worthwhile investment if you plan to stay in the home longer than the break-even point.

11. Lock in the best refi rate

When you find a great refinance rate, you can ask your lender to “lock” the rate. A mortgage rate lock is a guarantee from your lender that your interest rate won’t rise while the loan is being processed.

The amount of time you can lock the rate varies by the lender — it could be 30 days to more than 90. Before locking the rate, ask your lender whether it charges for the rate lock, either as a percentage of the loan or a dollar amount, and how long it will last.