Scoring a super-low mortgage rate for your refinance

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As mortgage rates have been tumbling to new all-time lows, homeowners have been rushing to refinance and shrink their monthly house payments.

It’s a good defensive move for households whose finances have been battered by the coronavirus outbreak and market crash.

But if you’re determined to refinance and save, how do you score a mortgage rate that’s supremely low, instead of — well, just kinda low?

Here are six tips for getting the best refi rate you possibly can.

1. Be sure you’re a good refinance candidate
Will a refinance really save you money? Some experts say a good measure is whether you currently have a 30-year mortgage with a rate higher than 4% — and many people do.

Rates recently hit an average 3.23%, a new all-time low in the nearly 50-year-old weekly survey from mortgage company Freddie Mac. Since then they’ve risen, but only slightly. A year ago, the typical 30-year mortgage rate was over 4.10%.

The best rates go to borrowers whose credit scores are exceptional (800 or above) or very good (740 to 799), but note that some lenders have been tightening their credit score standards amid the current crisis. If you don’t know your credit score, you can easily take a look at it for free.

When you apply for your refinance loan, you’ll need to show that you’re earning income — which might be a challenge right now.

“If a borrower is furloughed or laid off, unless they can still qualify using other types of income, that file will be denied,” says Richard Pisnoy, a principal with Silver Fin Capital Group, a mortgage broker in Great Neck, New York.

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2. Shop around to find your best rate
To get the best deal on your refinance, you’ll want to compare rates from several lenders, not just settle on the very first loan you see.

Homeowners who comparison-shop for their refi loans save an average of around $163 a month, or $1,953 a year, versus those who don’t, a recent LendingTree study found.

The savings can be really jaw-dropping in high-price markets.

Borrowers in San Francisco who don’t shop around pay an average of more than $66,000 in extra interest charges over the life of a mortgage. In Boston, you’ll pay about $59,000 more, according to the study.

3. Be ready to pay closing costs
To land the lowest mortgage rate you can get, you’ll want to pay your loan’s 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.

If you took out your mortgage early in 2019, a refinance today will save you $60 a month for every $100,000 you borrow, LendingTree chief economist Tendayi Kapfidze said recently. So, you might easily make back your closing costs if you plan to stay in the home at least a few more years.

“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.

If you don’t have the cash to pay closing costs upfront, you could do what’s called a no-closing-cost mortgage and have your lender cover some of the fees for you. But in exchange, you’ll have to accept a higher interest rate.

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4. Prepare to act fast
The coronavirus crisis has made financial markets volatile, and mortgage rates have gone through some gyrations, too.

“Loan packages can get sent out and by the time they get returned, the rate may no longer be available,” Pisnoy says. “It is extremely important to be able to move quickly in this environment when locking a rate.”

That means working ahead of time to gather up all of the usual, necessary documentation — including pay stubs, bank statements and tax returns — and having 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, Pisnoy says.

5. Have realistic expectations
People in the mortgage industry say some homeowners who’ve heard that the Federal Reserve has cut interest rates down close to zero think that they can get mortgages at 0%.

Sorry, but no.

While 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: Pisnoy says when you take out your loan, consider paying “discount points,” which are fees amounting to a percentage of your mortgage amount.

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Paying points reduces your mortgage rate, and it’s a strategy that has become even more effective.

“It seems that paying points may be able to go a little further than it used to,” Pisnoy says. “Instead of lowering a rate by 0.25 of a percentage point when paying one point [1% of your loan amount], maybe it will lower the rate even more.”

When you pay points, you “buy down” your mortgage rate — which also will lower your monthly mortgage payment.

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