Lesson Summary: This article explains how to shop for and compare refinance rates when refinancing your home loan. You’ll also learn what it takes to qualify for the best rates in the current economy.
Mortgage rates hovered below 5% for most of 2014, and this trend may continue well into 2015. As a result of these low rates, a lot of homeowners are trying to refinance their homes. But the numbers you see in the news are just averages. You might qualify for a rate that is lower or higher than average, based on several factors such as your credit score and debt level. In order to get the lowest possible rate, you’ll need to shop around and compare different offers. Here’s how to go about it.
How to Compare Rates When Shopping for a Refinance Loan
Quick disclaimer: This process will vary from one homeowner to the next. People have different credit scores, incomes, and levels of equity. Lenders have different underwriting guidelines and criteria. So there are plenty of variables from one refinancing scenario to the next.
Despite these variables, there are certain steps that most borrowers take (or should take) when comparing refinance rates. Those are the steps I’ve included below.
1. Before you start comparing rates from different lenders, you should find out where you stand with your equity. If you have little or no equity in the home, you’ll have trouble getting approved for a refinance loan. To measure your equity, subtract your current mortgage balance from your home’s current value.
2. If you measure your equity and find out that you’re actually upside down in the loan (meaning you owe more than the home is worth), you might not be able to refinance at all. There are some government programs to help people in this situation, but the loan would have to be owned / guaranteed by Freddie Mac or Fannie Mae. To learn more about government refinancing programs, visit MakingHomeAffordable.gov.
3. It’s also a good idea to check your credit score before you start talking to lenders. This is one of the key factors that will determine the mortgage rate you get on your refinance loan. So it’s something you need to know. The last thing you want is for lenders to know more about your credit than you do. So before you gather quotes and compare refinance rates, get your credit scores from all three reporting companies (Equifax, TransUnion and Experian).
4. Okay, so you’ve measured your equity and checked your credit, and you feel that you’re a good candidate for refinancing. What next? Now you want to research the average interest rates on mortgage loans, so you have a framework in mind. You can get this information from Freddie Mac’s weekly summary (www.freddiemac.com/pmms/), and also from Bankrate.com.
5. Now you are armed with the information you need to shop wisely. You know where you stand in terms of credit and equity, and you know the average rates being given out by lenders. Now you’re ready to ask for quotes and compare mortgage refinance rates between different lenders. The Internet makes this process much easier than it was in the past.
Just remember, the rate is not everything. Yes, it’s one of the ingredients you need to calculate your future savings (and thereby determine if a refinance loan makes sense). But the interest rate is only one piece of the puzzle. You also need to compare the closing cost estimates provided by different lenders, because this could make the loan cost-prohibitive.