Refinancing your mortgage can potentially save you thousands of dollars over the life of the loan—that is, if you're able to secure a lower interest rate. Generally, it makes sense to refinance if you can reduce your current mortgage rate by at least 0.5% to 0.75%. Getting the best possible refinance rate, however, requires some strategic planning.
Improve your credit score
Your credit score is one of the biggest factors that impacts the mortgage rate you'll receive. Lenders reserve the lowest rates for borrowers with excellent credit, typically scores of 760 or higher. Pay down credit card balances, correct errors on your credit report, and avoid new debt before applying to refinance. Even a minor credit score improvement could help you qualify for better refinance pricing. Here are more of our tips for boosting your credit score to put you in the best lending position possible.
Buy mortgage points
When you purchase discount points (also called mortgage points), you pay an upfront fee to "buy down" the interest rate on your new loan. Each point costs 1% of the loan amount and typically lowers your rate by 0.25%. Buying points makes sense if you plan to stay in the home long enough for the upfront costs to be offset by the monthly savings. Here's my guide to how mortgage points work and when you should look into them.
Pay closing costs upfront
Some lenders offer "no closing cost" refinances where they cover fees in exchange for charging you a higher interest rate over the life of the loan. To get the absolutely lowest rate, opt to pay all closing costs out of pocket. Closing costs generally run between 2-5% of the loan amount.
Shop multiple lenders
Mortgage refinance rates can vary significantly between lenders on any given day. Get quotes from at least three to five banks, credit unions, and mortgage companies. Having multiple offers allows you to leverage the lowest rate quotes and ask competitors to match or beat the pricing. Check out these tips for shopping lenders the same way you'd research a restaurant—especially if you want to give yourself the best shot at ordering something you'll enjoy.
Ask for a rate match
If you find another lender offering a lower refinance rate, ask your preferred bank to match the better pricing. Some lenders are willing to match or even slightly undercut a competitor's quote to win your business.
The bottom line: The lower the interest rate, the more affordable your refinanced mortgage payments will be each month. Employing tactics like improving your credit, paying points, and shopping around can help you refinance at the lowest rate available and maximize your savings.