Record-low rates harder to find for refinancers
For home buyers, the silver lining of the COVID-19 economy (if there is one) is that interest rates dropped to record lows in recent weeks.
If you’ve been considering buying a house, you may be able to lock in rates below 3%. Some could even see rates as low as 2.5%.
But refinancing is another matter.
At some major banks and lenders, interest rates for refinance loans are significantly higher than those for purchase.
That means if you’re refinancing, you’ll need to be extra thorough in your research. Rate shopping could net you bigger savings now than ever before.Find and lock a low refinance rate (Oct 28th, 2020)
Just how much higher are refinance rates?
In the past few weeks, advertised purchase rates fell much further than refinance rates. To give just a few examples:
- Chase Bank, for instance, was offering purchase loans at 2.875% in mid-May, compared with 4% for 30-year fixed-rate refinances.
- In the last week of May, Wells Fargo was advertising 3.125% for a 30-year purchase loan, and 3.5% for a refinance
- At the same time, Bank of America showed 3.375% for purchase and 3.625% for refinancers
This makes things a little tougher for homeowners who were hoping to secure better loan terms or take cash out of their houses to weather the crisis.
But if you’re committed to refinancing now, there are still ways to access historically low rates.
5 ways to get a lower refinance rate right now
Here are five things you can do improve your chances of scoring a record-low refinance rate:
1. Refinance to a 15-year fixed-rate loan
One way to get a lower interest rate is to commit to a shorter term, as rates for a 15-year fixed-rate loan are lower than for 30-year agreements.
As of May 20, Wells Fargo was offering 3.75% on 30-year fixed-rate mortgages versus 3% for 15-year fixed-rate loans.
The big caveat to keep in mind is that 15-year mortgages typically have much higher payments than 30-year mortgages. So refinancing to a 15-year loan requires more flexibility in your budget.
But if you can handle the higher monthly payments, you may be able to save thousands through the reduced rate and fewer years of paying interest.
2. Skip the cash-out refinance
If you don’t need extra cash right now, you may want to refinance to a lower interest rate but opt against a cash-out refinance.
Even in a less volatile market, cash-out refinances have higher rates because you’re borrowing money on top of what you still owe on your mortgage.
Cash-out refinances also tend to carry higher fees, and lenders may have more stringent requirements than with standard refinances because they’re taking on more risk.
So skipping the cash-out, for now, can make it easier to qualify and lower your interest rate even more when you refinance.Verify your refinance eligibility (Oct 28th, 2020)
3. Maintain good credit
Remember that your credit score and debt-to-income ratio (DTI) will affect your chances of approval and your interest rate.
If you’re serious about refinancing, avoid opening any new credit cards or taking out another loan while you are shopping for rates or waiting for a lender’s response.
Opening new credit accounts can ding your score. And taking on any new monthly payments will increase your DTI. That makes you look “riskier” to a lender — and your rates can go up as a result.
Although some lenders are relaxing their restrictions again somewhat, no one knows where the economy is headed and circumstances are changing rapidly.
You want your credit score as high as possible and as low a DTI as you can manage to get the best rates.
4. Compare offers from several lenders
Whichever type of refinance you choose, compare refinance rates at different lenders.
If you’re comfortable with your current lender, ask what you’ll qualify for and whether they have any rate incentives to refinance with them. Your current may be willing to reduce or waive certain fees, or they may offer interest rate reductions for current customers or those who choose to autopay their monthly installments.
Even if you’re comfortable with your current lender, we still recommend checking rates from a few others before moving forward with your refinance.
That way you can be sure you’re getting the lowest refinance rate possible — and if not, you can switch lenders for a better deal.
5. Lock in a low rate once you find it
No one knows how the pandemic will continue to affect the economy, which means that rates could drop even lower within the next few months.
But they could also climb, and you may miss your window for reducing your mortgage payments. If you are eager to refinance immediately, you may want to lock in a low rate as soon as you’re offered one with which you’re satisfied.
If rates go significantly lower, you can consider refinancing again (though you’ll need to decide whether there’s enough of a difference to warrant the additional closing costs).Find and lock a low refinance rate (Oct 28th, 2020)
Why haven’t refinance rates dropped as much as purchase rates?
The sheer volume of refinance applications right now is largely to blame for the rate difference between purchase and refinance loans.
Homeowners made a rush on refinance opportunities at the end of 2019 and beginning of 2020, even before the coronavirus was declared a pandemic in the U.S.
Mortgage data firm Black Knight reported that refinances hit their highest point in more than six years in late 2019, and cash-out refinances were at a 10-year peak.
Lenders were swimming in refinance applications thanks to already-low interest rates. In response, lenders raised their rates.
Lenders were swimming in refinance applications thanks to already-low interest rates. In response, lenders raised their rates, possibly to stem the tide of people wanting to capitalize on lower rates.
Then the pandemic sent the economy into a tailspin, with wildly varying predictions about an impending recession, how long it will be before the country enters a recovery, and whether a second wave of COVID-19 infections will force another round of shutdowns and further slow the economy.
The uncertainty drove lenders to tighten their borrowing criteria, both for purchase and refinance loans.
Lending criteria could remain tight to avoid a second refinance boom this year if mortgage rates drop even lower.
Investors may be skittish about buying mortgages or refinance loans if they’re worried that homeowners will refinance in the near term, or if they’re concerned about defaults due to unemployment.
In other words — if you qualify for an ultra-low rate right now, it’s a good time to consider locking that rate in. If rates do fall again, it might become even tougher to access mortgage credit.
Should I refinance right now?
If you’re not able to refinance right now, continue watching the market and stay in touch with your lender.
As the demand for refinance loans eases, there may still be opportunities to take advantage of low rates later in the year.
If you are in a position to refinance, set yourself up to take advantage of low rates. Keep up a high credit score and low debt ratio.
Most importantly — shop with a few different lenders to make sure you’re being offered the lowest rate you qualify for.Verify your new rate (Oct 28th, 2020)