You thought 2020 had jaw-dropping mortgage rates?
The first week of the new year delivered the lowest rates in history, according to a long-running survey, and homeowners are rushing to refinance and cut monthly house payments.
It’s never a bad time to cut costs — and right now it’s especially important for households squeezed by the coronavirus pandemic.
But dirt-cheap home loans may not stick around forever. So, how can you be certain of scoring one of those record-low mortgage rates, instead of just a plain old low rate?
Here are six tips for getting the best refi rate you possibly can.
1. Make sure you're a good refinance candidate
First, be certain that a refinance is worth doing. Experts say a rule of thumb is to refinance if you can get a new rate that's 1 to 2 percentage points below your current rate.
Rates were topping 4% as recently as spring 2019 — but in recent weeks, they’ve cratered below 2.7% for the first time in history, according to mortgage giant Freddie Mac.
The best rates go to borrowers whose credit scores are exceptional (800 or above) or very good (740 to 799). If you don't know your credit score, you can easily check it for free.
2. Shop around to find your best rate
To get the best deal on your refinance, you'll want to compare rates from multiple lenders — and not settle for the very first loan you see.
Rates can vary widely from one lender to another, particularly now that some lenders have raised their refi mortgage rates to compensate for a 0.5% fee on refinance loans that a government agency began charging on Dec. 1.
Borrowers who get at least five rate quotes save an average of $3,000 more than those who get just one quote, a Freddie Mac study found.
3. Be ready to pay closing costs
To land the lowest mortgage rate you can get, you'll want to pay your loan closing costs upfront.
Typically, you'll be charged fees equal to 2% to 5% of your loan amount. Including taxes, the average for U.S. closing costs is $5,749, according to the latest estimate from real estate data firm ClosingCorp.
"Speak with a professional who can help determine if the benefits of refinancing outweigh the costs," says Alan Rosenbaum, founder and CEO of the New York-based mortgage lender GuardHill Financial Corp.
Don't have the cash to pay closing costs? You could do what's called a no-closing-cost mortgage and have your lender cover some of the fees for you — but the downside is that you'll be given a higher interest rate.
4. Prepare to act fast
The coronavirus crisis has made financial markets volatile, and mortgage rates have been gyrating all over the place, too.
That means borrowers need to be proactive in gathering up all the usual, necessary documentation — including pay stubs, bank statements and tax returns — and have that stuff ready to present to a lender.
Make sure your lender or broker has the ability to send paperwork to you electronically, so you can sign everything immediately and get your rate locked.
The closing process can take time. The average it takes to close a refinance loan has been increasing due to the high demand resulting from low rates, according to the mortgage technology company Ellie Mae. When you lock the rate your lender quotes you, the interest on your loan will be guaranteed for up to 60 days.
5. Have realistic expectations
People in the mortgage industry say some homeowners who've heard the pandemic led Federal Reserve to slash its benchmark interest rate (the "federal funds rate") nearly to zero think they can get mortgages at a similar rate.
While refinance mortgage rates are at some of the best levels ever seen, they're not at 0%.
The Fed doesn't have a direct impact on long-term, fixed mortgage rates, but on short-term and variable-rate loan products, such as credit cards and home equity lines or credit (HELOCs).
The rates on those don't match the Fed's benchmark rate either. Instead, they're tied to the prime rate, which is set by banks and moves up and down in sync with the Fed's federal funds rate.
6. Be willing to pay 'points'
Here's one more piece of advice to help you snare the lowest rate out there: When you take out your loan, consider paying "discount points," which are fees amounting to a percentage of your mortgage amount.
Paying points reduces your mortgage rate. As people in the industry put it, when you pay points, you "buy down" your mortgage rate — which also will lower your monthly mortgage payment.
One point typically lowers your rate by one-quarter of 1 percentage point (0.25), so a 3% rate would fall to 2.75%.