Refinancing your home to capitalize on today's lowest-ever mortgage rates has been one of hottest trends of 2020. Homeowners have been refinancing at more than double last year's pace, according to multiple sources.
Mortgage rates keep dropping to new records, giving homeowners a major incentive to refinance and score savings. Rates have dropped to their 12th record low this year, in the long-running weekly survey from mortgage giant Freddie Mac.
An estimated 18.5 million Americans could refi and lower their interest rates enough to slash their monthly payments by an average $304, according to research released last week by the mortgage data firm Black Knight.
But borrowers need to hurry to beat a new refinance fee that officially takes effect in a few weeks. Here are four tips for getting the best deal when refinancing into a fresh 30-year mortgage.
1. Gather mortgage offers and compare rates
Refinancing into another 30-year loan can be the right choice if your current mortgage is relatively young. You won't be stretching out your interest costs all that much if you've been in the home just a year or two.
Average rates have slid to an all-time-low 2.78%, Freddie Mac reported on Thursday. And that's the average; some lenders are offering 30-year loans at 2.5% or lower.
Rates have fallen so far that you could be an excellent refi candidate if you have a mortgage you took out as recently as the beginning of 2020, when the average was around 3.75%.
But borrowers can't assume they'll always be be presented with the lowest rates possible. Different lenders can offer the same homeowner vastly different refinance rates, especially since some are already factoring in a new 0.5% fee on refi loans that formally starts Dec. 1.
To find your best refinance deal, you've got to shop around and compare rates — don't stop your search at the very first loan you're offered. A Freddie Mac study found if you get five rate quotes, you'll pay lifetime costs averaging $3,000 less than if you end your search after hearing from only one lender.
2. Polish up your credit score
A better credit score brings better mortgage rates. Lenders like borrowers whose credit scores are very good (in the 740-to-799 range) if not exceptional (800 to 850).
To get the kind of refinance loan that will save you hundreds of dollars a month, you'll need a score of at least 720, Black Knight says.
Don't know your credit score? It's easy enough to get a look at it for free.
If you find your credit score needs some help, take steps to raise it:
Pay down your other debt, especially on credit cards. A debt consolidation loan might help you get rid of credit card debt more quickly, and at much lower interest.
Don't open new credit cards, but don't close old ones either. If you do that, you'll reduce your available credit — which could hurt your score.
Get your hands on your credit reports and make sure there are no errors that could be dragging down your credit score. A 2012 study from the Federal Trade Commission found 20% of U.S. consumers had potentially costly mistakes on their credit reports.
3. Show a lender you're invested in your home
Refinancing homeowners who have healthy amounts of equity in their homes tend to score the cheapest refinance rates.
Equity is the percentage of your home's value that you own. To determine your equity, take the amount you've already paid on your home and divide that by what the house is currently worth. That figure — which should be to the right of a decimal point — represents your equity percentage.
To a lender, the ideal refi candidate has at least 20% equity, Black Knight says. If you still have a ways to go to reach the 20% level, you'll want to make a down payment that will put you over the line.
As an added bonus, you won't be forced to buy or keep paying for private mortgage insurance, if you've got at least 20% equity in your home.
Private mortgage insurance offers a lender protection in case a borrower defaults. It's not to be confused with homeowners insurance — which offers you protection if your house is damaged by fires, tornadoes and most other types of disasters.
You should already have home insurance — it's vital, and most lenders require it. But each time your homeowners policy comes up for renewal, go online and get a bunch of rate quotes so you can feel confident you're not overpaying for your coverage.
4. Be willing to pay 'points'
The optional fees known as "discount points" are a type of upfront payment that can help you bag a low 30-year mortgage rate. One point equals 1% of your loan amount and can lower your rate by as much as one-quarter of 1 percentage point, say from 3.2% down to 2.95%.
Jaw-dropping mortgage rates often — though not always — come with points.
"By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time," says the U.S. Consumer Financial Protection Bureau. "Points can be a good choice for someone who knows they will keep the loan for a long time."
You'll need time to break even on the points and other closing costs before you can truly start enjoying the savings from your low mortgage rate.
The CFPB says lenders have their own individual pricing structures, so don't make the assumption that a loan with points will always have the lowest rate out there. You might find another lender offers a loan with zero points and a better rate.
It's another good reason to gather multiple loan offers and review them side by side — to make certain you get the best mortgage rate available to you.