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Refinance Information >> The Interest Rate
Home Loan Refinance Rates - 5 Things You Need to Know
by Brandon Cornett
If you're considering a home loan refinance in the near future, then you probably have questions about interest rates as well:
How do I qualify for the best refinance interest rates in order to save money? What kind of rate do I need to make refinancing financially beneficial to begin with? How do lenders determine what rate they're willing to give me?
There are just a few of the common questions homeowners have when they refinance a home loan for the first time. In this article, we will address several of these important questions. Here are five things you need to know about home loan refinance rates and how they are applied.
1. Not everyone qualifies for the best rates.
When you turn on the TV and here that the Fed has "cut the rates," it usually means that the Federal Reserve has lowered the short-term interest they charge on loans to financial institutions. In other words, it applies to banks lending money to each other. But this also influences the home loan refinance rates you and I receive, because when the Fed charges less interest to lenders, those lenders can pass the savings on to consumers like us.
However, when you hear about a certain interest rate in the news, it doesn't necessarily mean you'll qualify for that rate when you refinance your home loan. In order to qualify for the best / lowest interest rate, you must be a well-qualified borrower. In fact, when lenders advertise a low percentage to lure customers, it's always followed by an asterisk mark with a disclaimer. Look in the fine print and you'll see something that says, "This rate applies to well-qualified borrowers only."
2. Your credit score plays a big role.
Think back to when you applied for the original mortgage loan for your home. Remember how the lender put your finances under the microscope? Well, that's going to happen again during the refinancing process. And the results of that review will determine the home loan refinance rate you're able to get.
Some homeowners think they'll have a "rubber stamp" approval process when they apply for a refi loan, since they've qualified for a mortgage in the past. But this is not the case — especially after the economic meltdown of 2008. You can rest assured that your home loan refinance will be a thorough as your original mortgage qualification process.
The lender will consider your credit score, your debt-to-income ratio, the amount you owe on your current mortgage, and (ultimately) the appraised value of your home in the current market. But when it comes to the refinance rate they offer you on the home loan, your credit score reigns supreme.
3. You need to shop around for multiple offers.
Just because the news is talking about a 5% interest rate doesn't mean every lender is going to offer it to borrowers. Just like there are differences in how well people are qualified, there are also differences in how lenders make loans. Some are more efficient than others with their internal processes, so they can offer more attractive terms to borrowers (which usually means a lower home loan refinance rate as well).
So you should shop around to get offers from more than one lender, just like you would get a second quote for any other type of service. In the "old days" before the Internet, this meant you had to drive around town or spend endless hours on the phone. But now, you can submit a single form through a website and get offers from several lenders at once. With LendingTree, for example, you can get up to four offers by completing a form on their website. And you can get started right here.
4. The refinance rate helps you determine the break-even point.
To find out whether or not a refinance even makes sense for you, you'll need to determine something called the break-even point, or BEP. This is the point after which the money you save from refinancing exceeds the amount you spend in closing costs. In other words, it's the point where a home loan refinance becomes financially beneficial for you. And the interest rate is the key ingredient needed to determine the BEP. You'll also need to know the estimated cost of the loan (i.e., closing costs).
5. The savings must exceed the cost of refinancing.
Once you know how much the loan is going to cost, versus how much it could save you, you can run the numbers to see if refinancing is a good idea. This article explains how to go about it. A good mortgage lender will actually do this for you, and they won't offer you a refinance loan unless it benefits you financially. Some states even have laws in place to enforce this kind of responsible lending. But not all states have such laws, so you have to lookg out for yourself. You have to get all the data, run it through a mortgage refi calculator, and see if it makes sense to go through with it.* Copyright 2008, Brandon Cornett. Brandon is the publisher of the Refinancing Q&A Blog as well as the Home Buying Institute.
