Thanks to this year's breathtakingly low mortgage rates, refinancing remains a must for many homeowners — and it has taken on even more urgency as a new fee has led some lenders to push their refi rates higher.
A 30-year fixed-rate mortgage might be a borrower's go-to loan for a refinance. But if you've been in your house a few years, refinancing to a 15-year mortgage can help you avoid dragging out the debt and piling up massive lifetime interest costs.
The monthly payments on a 15-year home loan can be stiffer, but the interest rates are lower — currently averaging an all-time-low 2.28%, nearly one-half of one percentage point less than the typical 30-year mortgage rate, according to mortgage company Freddie Mac.
Even better, good comparison shoppers are finding 15-year loans far below the average, at under 2%. Here are four tips on how you can get the very best deal when refinancing into a 15-year mortgage.
1. Do the math on 30- and 15-year loans
Most mortgage lenders offer both 30- and 15-year terms. Compare the current average rates between the two loan products, then zero in on a couple of lenders and see how their 30- and 15-year rates differ.
If 15-year mortgage rates don't seem substantially lower, it may not seem worthwhile to accept the steeper monthly payment that comes with the shorter-term loan.
Still, the long-term savings can be considerable.
Freddie Mac says rates are now averaging 2.72% for a 30-year fixed-rate mortgage, versus 2.28% for the 15-year option. Let's say you're trying to decide whether to refinance a $200,000 mortgage balance for either 15 or 30 years, at today's average rates.
Your monthly payment (principal plus interest) would be $1,313 with a 15-year mortgage at 2.28%, yet only $813 with a 30-year loan at 2.72%.
But you'd pay total interest of about $36,400 with the shorter-term loan, versus roughly $92,900 — $56,500 more — over the course of the 30-year mortgage.
2. Be the best borrower you can be
Before you start applying for mortgages, check your credit score. These days, it's very easy to take a peek at your score for free.
A lender wants to feel confident you'll pay back the loan and not default — particularly at a time when so many people are in a financial squeeze from the coronavirus pandemic. A very good (740 to 799) or excellent (800 or higher) credit score will help provide that assurance.
If your score could stand improvement, request copies of your credit reports from the three major credit reporting bureaus — Equifax, TransUnion and Experian — and make sure they're accurate.
Bad information, such as debts that aren't yours, or debts that are too old and should have fallen off the reports, can weigh down your credit score.
Sharpen your score by paying down debt (especially credit card balances), getting bill payments in on time, and not opening new credit accounts while you're shopping for a home loan.
3. Shop around (quickly) for a great rate
Once you've settled on a 15-year mortgage for your refi and have determined your credit score looks solid, check rates from multiple lenders in your area. Review them side by side to identify the best deal available to you.
As you research rates online, you may want to look at the websites of major banks operating where you live. They often have similar pricing on their mortgages, but you might find one offering a cheaper rate or more favorable terms.
Small local banks and credit unions often have affordable rates, but the approval processes can be slower.
You'll want to move quickly, because some lenders have been raising their refi mortgage rates, to factor in a new 0.5% fee on refinance loans that officially takes effect on Dec. 1.
Freddie Mac and Fannie Mae — two government-sponsored mortgage giants that buy or guarantee most U.S. mortgages — say they're introducing the fee because they need to offset billions in losses from defaults related to the COVID-19 crisis.
4. Pay as much as you can upfront
If you don't have much equity in your home, making a larger down payment on your refinance loan can help you land an extremely low 15-year mortgage rate for your refi.
Like a decent credit score, a bigger down payment is a way of demonstrating to the lender that you're a good risk and deserve a low rate.
If you're heavily invested in your house, it's less likely you'll walk away from your mortgage.
Plus, making a down payment large enough to give you at least 20% equity in your home will keep troublesome private mortgage insurance (PMI) premiums from being tacked onto your house payments.