29 Mar The 6 Top Tools to Reduce Your Mortgage Rate
As the country forges a path to economic recovery in the wake of the pandemic, you too may be working on your own financial rehab for 2021. One area that could be a resource for improvement is your monthly mortgage payment. Refinancing is a great option these days but will probably only make an impact if the mortgage rate is actually reduced from your current rate.
Just how much do you have control over? More than you’d think.
What is a Mortgage Rate?
Because the interest makes up a percentage of your loan, mortgage rates have a lot to do with the affordability of your home when purchasing. The same holds true for refinancing. If the difference in mortgage rates was as little as one percent more, resulting in an additional $50 or $100 per month, the total amount over the life of the loan could be well over $10,000. Paying that much would ultimately defeat the purpose of refinancing.
Conversely, one percent lower in interest and the savings could be substantial.
While the government, the economy, and your lender all help determine the mortgage rate offered to borrowers, other factors include credit score, term, loan-to-value ratio (LTV), and the type of program. Let’s look at some tips and tools to help you reduce your mortgage rate.
With a little bit of foresight and planning, you can nudge your FICO score in the right direction and end up saving thousands. Most lenders work with all levels of credit standing, but because many non-government programs price by the score in 20-point tiers, even a few points can make all the difference – in interest rate and monthly payment. A few tips to consider trying before refinancing:
- Check your report for errors. There are services that can correct bad information within days to help improve your numbers.
- Paying credit card balances down to 30% of the limit where possible.
- Don’t apply for any new credit until after the refi is finished.
- Lacking credit? See about becoming an authorized user on the account of a family member with excellent credit. Even if you don’t use the card, it becomes part of your credit report.
Your home’s equity and the amount you borrow will determine your loan-to-value ratio, which also affects your mortgage rate. A lower ratio means less risk for a lender who is then able to offer a lower rate. Keeping your LTV at 80% or lower also results in eliminating costly private mortgage insurance (PMI) for more savings.
Mortgage rates are typically quoted with a 30-day lock; any longer and you’ll most likely pay higher fees. To avoid locking in for 60 days and paying more, there are some steps to take in order to close faster.
- Review your credit report in advance to catch any errors or issues before the lender pulls it.
- Be sure to have all the documents assembled that your lender will need: current mortgage, tax returns, pay stubs, W-2s, bank statements, homeowners’ insurance, etc.
Reduce the Term
If you want to save more money in the long run, while possibly paying more now, consider refinancing to reduce the term of your mortgage. In other words, reducing your term from a 30-year mortgage to 15 or 20 years might mean more monthly payment now, but significant savings over the life of the loan.
Lenders typically offer lower interest rates for shorter term loans, which means you save big and own your home outright, sooner. This scenario is ideal for those planning to stay in the home long term.
Not sure of your long-term plans, but still eager to save on your mortgage rate in the short term? Consider an adjustable-rate refinance. Commonly known as an ARM, the adjustable-rate mortgage is just what it sounds like. Unlike the fixed-rate loan, the variable interest rate of an ARM can go up and down for the life of the loan depending on the predetermined terms.
At a certain point – usually in 3, 5, or 7 year-frequencies – the rates will reset according to the market. The interest rate can be very low in the introductory phase so it’s wise to refinance with an eye on selling or refinancing again before the unpredictable rate increases.
Interest rates are very competitive now as the pandemic recovery progresses. Even so, experts advise borrowers to obtain several mortgage quotes in order to make an informed decision on their refinance objectives. Exploring your options can mean finding the best mortgage rate, lower fees and costs, and also making sure your lender has your best interests at heart.
Mortgage rates can change quickly, so get your quotes on the same day when possible and ask for a standard loan estimate. This will list your costs and rate and allow you to compare when it’s time to lock in.
We at EnTrust Funding (ETF) know how important it is to work with a reputable professional when making the decision to refinance. We encourage you to use the applicable tips and tools we’ve shared to reduce your mortgage rate, then shop and compare. Contact us today and we’d be happy to discuss your goals and how we can help!