Refinancing your mortgage is usually a great way to save money on your bills every month. And these days, mortgage rates are still in the area of 3%, so many people find that they can lower their mortgage payment by refinancing. Over the last thirty years, the rate and term refinance has been the most popular option because homeowners are always looking for ways to reduce their housing expenses.
What Is a Rate and Term Refinance Mortgage?
A rate-and-term refinance enables you to swap out your primary mortgage for a new one, allowing you to adjust the term of your first lien or your interest rate.
This type of rate and term refinance can help you reduce the amount of interest you pay over time, decrease your monthly payments, or accelerate the payoff of your mortgage debt.
A rate and term refinance, often referred to as a traditional or no cash-out refinance, enables you to modify the interest rate and loan term without altering the principal balance.
Homeowners typically commit to a rate and term refinance to accomplish objectives such as obtaining a lower mortgage rate.
Interest rates are higher for cash out refinances, so you will appreciate the lower rate that comes along with rate and term refinancing.
However, to get the best deal and best rates, what are some of the strategies you should use?
What Motivates Homeowners to Choose a Rate and Term Refinance
- Reducing your monthly mortgage payment.
- Decreasing the total interest you pay over the life of the loan.
- Shorten the term to accelerate the payoff of your mortgage. (30 to 15-years)
- Switching your loan an adjustable-rate mortgage to a fixed-rate
- Desire to refinance a FHA loan to a conventional loan.
- Eliminating private mortgage insurance.
- Increased credit score for lower interest rates
How to Get the Best Mortgage Offer with Rate and Term Refinance Loans
There are many trusted mortgage lenders striving to earn your business.
There are various circumstances where a rate and term refinance might be advantageous.
One reason could be a significant drop in mortgage rates.
Another could be the expiration of the initial fixed-rate period on an adjustable-rate mortgage.
There are some smart strategies that you can rely on both in personal finance and in looking for a home refinance loan that will get you the best interest rate with the lowest closing costs.
#1 Start on the Internet
Many financial experts recommend that you just start your refinance search online with a simple refinance calculator. This will allow you to easily estimate your monthly payments for various types of loans. You need to feel good that you are getting a competitive refinance mortgage rate.
A shorter-term loan, such as 15 years, will have a lower interest rate than a 30-year loan. However, your payment will usually be 20% higher at least, as you are paying down the mortgage faster. Before you ever talk to a lender, you will want to have a good idea of what type of payment you can handle. Typically conventional refinance mortgage offers the best interest rate, because the borrowers typically have the best credit scores and lowest debt to income ratios.
Remember that you could well qualify for a higher payment than you really want. By having your financial goals in mind and a payment you want to stick to, you will be better off as you start loan shopping.
#2 Decide on a Mortgage Term
The length of term for your new loan has to be decided upon in context of your general finances. For example, if you hold $35,000 in credit card debt and have not saved for college for your children, you may want to get a longer term loan of 30 years or more to keep your payments down. But someone with more savings may want to have a shorter term so that they can build their equity more quickly. If you are not doing research for your primary residence, you need to get mortgage rates for a second home.
#3 Talk to Several Lenders and Brokers
Different mortgage loan providers may offer different rates for very similar loan products. Experts often recommend getting some quotes from a credit union, community bank a direct mortgage lender and a national bank to see what kind of terms they offer.
Just as important as the rate is to work with a refinance mortgage lender that you trust and that has good customer service. Many home loans get tied up in red tape, so it is critical to have a lender who communicates with you well.
When refinancing, homeowners should always verify they have the best mortgage rate available.
#4 Carefully Review Your Mortgage Options
A good lender will sit down with you and carefully go over your different refinance loan options. There are many conventional and government backed loan products that have very different terms and interest rates. Which one is best for you will depend upon your financial situation.
#5 Increase Your Credit Score
Before you start to look for different mortgage refinance options, experts advise you to raise your credit score as much as you can. For most home refinance programs, having a credit score of 740 will put you in line for the best rates.
To refinance at all, you will usually want to have a credit score of at least 640. You will pay a higher interest rate at that level of score, but you should be able to refinance it later when your credit improves. Be sure that you have no late payments on your credit profile in the last two years to get the best possible rates. If you have below average credit, you will need to get a bad credit refinance or take out a 2nd mortgage for bad credit if you need cash and decide not to do a rate and term refinance.
#6 Reduce Your Total Debt
When you pay your bills on time and you reduce your balances owed, you will reduce your debt to income ratio (DTI), and this will improve your chances of getting a lower refinance rate. You should try to make sure that your DTI is lower than 36%. Never buy a new car or take on a lot of new debt as you are mortgage shopping. Even with a high credit score, a high DTI could prevent you from getting a mortgage refinance.
#7 Boost Home Equity
Having a lower loan to value rate when you refinance can have a big effect on your refinance rate. This can be much bigger than the effect of a small increase in interest rates. So, try to pay down your mortgage as quickly as you can. When it comes time to refinance, you may find that you can get a better rate if you have more than 20% equity. Whether you need a first or second mortgage it makes sense to do things that would potentially increase your property’s value. Check home equity loan rates today.
#8 Collect Your Financial Information
Getting a mortgage refinance done as fast as possible has many benefits. It’s nice to not have the mortgage refinance application hanging over you. But also, you do not want the process to take more than 30 days as your rate lock can expire and then you will possibly pay a higher rate. Consider a 45 or 60-day lock if you are concerned that your refinance transaction may not be able to close in the 30-day rate lock proposed by your loan officer.
Takeaway on Rate and Term Refinance Mortgages
Additional situations that could make refinancing your existing mortgage to achieve better rate or a different term can offer immediate benefits. With a higher credit score than at the time you secured your current loan, you might qualify for a lower mortgage rate. In the right market, you could get a lower rate which could lead to lower monthly payments and increased savings. Alternatively, if your income has increased, you might choose to reduce the term of your mortgage to pay off your mortgage sooner.
Refinancing a mortgage is something that most homeowners will do more than once to reduce their monthly payment and lower their interest payments. If you want to get the best possible deal, we advise that you follow the tips above closely. By doing so, you may qualify for a superior rate an term refinance program and may even be able to save yourself thousands of dollars in interest charges and enjoy a much lower monthly payment for many years to come.
Securing a lower interest rate is perhaps the most significant advantage of a rate-and-term refinance. If mortgage rates have fallen since you initially obtained your first mortgage, refinancing could enable you to lock into a lower interest rate.
A lower interest rate through a rate-and-term refinance typically leads to a reduction in your monthly payment. Moreover, extending the term of your home mortgage during the refinance can further decrease your payments.
While rate-and-term refinances offer benefits, they are not suitable for every homeowner. Consider the total savings over the life of the loan that refinancing might offer, especially if you intend to stay in your home long-term.
After gathering a few estimates, compare the quotes to see how much refinancing could save you over the duration of your loan. Even a slight reduction in your interest rate could lead to significant savings.
The RefiGuide will help you shop for the best rate and term refinance loans that meet your goals and eligibility.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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