When you need to refinance your home, it’s wise to know the driving factors behind determining your interest rate. Listed below are the four primary factors to refinance to a lower interest rate.
How Credit Score Tiers Can Lower Your Interest Rate When Refinancing
Whether a loan is for a mortgage, credit card, or automobile, your credit score is an important factor when it comes to determining your interest rate. While it’s challenging to significantly raise your credit score, you can strive to reach the next credit tier level. The mortgage business has specific credit score tiers, and if you know where you fall, you can take actions to get to the next highest tier. In turn, you’ll receive a better mortgage deal, and be able to refinance to a lower interest rate. Lenders have offered better rates to each of the following credit score tiers, progressively:
Although the 740+ is the highest credit grade for mortgage purpose, if you currently have a credit score of 695, you need to find a way to get 5 more points in order to get a better mortgage offer. A licensed and experienced mortgage banker should be able to provide you with specific guidance on how to increase your credit score from 5–20 points in a relatively short period of time. These seemingly small but significant steps will help you refinance to a lower interest rate.
The Effect of Appraisals When Refinancing to a Lower Interest Rate
Once in the refinance process, many homeowners do not realize how important it is to have an accurate appraised value of their home when refinancing to a lower interest rate. One little known secret of the mortgage industry is that most lenders outsource all of their appraisal services. This means they are sub-contracting their appraisals through a third-party, which is commonly referred to as an Appraisal Management Company (AMC). The appraisers actually work for and report to the AMC and not the lender. In many cases, this leads to conservative appraised values that are not accurate. The appraisers are rarely held accountable by the lender because there’s almost never any direct contact between the two.
Refinance Lender-Appraiser Relations
Only a handful of lenders employ their own appraisers directly. Generally speaking, the appraisers are more accountable for the quality of their work when they work directly for the lender. The most common consumer complaint against lenders is faulty-appraised values. An artificially low appraisal equates to an artificially high Loan-to-Value (LTV), which in turn leads to a higher interest rate for you.
How to Eliminate PMI When Refinancing
A popular way to lower your interest rate when refinancing is to eliminate mortgage insurance, also known as PMI. The first way is to ensure that your lender that isn’t using an AMC for the appraisal—your LTV cannot exceed 80% in order to eliminate PMI, and outsourced appraisals tend to have higher LTVs. This reinforces importance of a quality appraisal. The second way to eliminate PMI is to make sure you are not in a mortgage program that requires mortgage insurance regardless of your LTV. For example, FHA and VA loans require mortgage insurance on 30-year mortgages regardless of your LTV ratio. Stay clear of these programs if you are trying to eliminate your mortgage insurance.
How Interest Rate Locks Impact Your Interest Rate When Refinancing
When refinancing to a lower interest rate, be aware of the length of your interest rate lock—it can impact your actual interest rate. Your goal is to avoid long rate-locks. A general rule of thumb is that for every two weeks of lock-time that you need for your rate lock, you add ⅛ percent onto your interest rate. For instance, if you lock in 4% for 30 days (which means you have to close before the lock expires), you’ll probably lock in 4.250% for 60 days. This additional quarter of a percent may seem miniscule, but it can cost you tens of thousands of dollars over the life of your loan.
You’re probably wondering “why would I lock in a rate for a longer period of time?” The answer is that the length of your rate-lock is primarily driven by the time your lender will need to process, underwrite, and close your loan. Some lenders only need 30 days. Others need 45 or 60 days. This is why it’s important to get a closing-date guarantee from your lender, so that you can lock in your rate for the shortest duration. If your lender needs more time, but you have a closing date guarantee, they will pay for the necessary rate lock extension fees instead of you.
These tips can help you achieve the goal of getting the lowest refinance interest rate, and can possibly lead to even paying off your mortgage sooner. Be aware of these suggestions when looking to refinance to a lower interest rate and evaulating offers from potential lenders—the reward of your savviness could be thousands of dollars.