If you're planning to refinance, you've probably searched for the lowest home mortgage rate. Perhaps you've ferociously typed away at a search engine entering "best mortgage rates," lowest refi rate," "lowest fixed rate mortgage," and so on. What you get is a lot of boasting and bravado, but often these rates are much like the tempting sirens of Greek mythology. Let's take a realistic look at the factors contributing to your refinance rate.
Credit Score
Ah, the all-important, yet mysterious make-or-break financial indicator. Your credit score goes a long way toward determining whether or not you walk away with the lowest refi rate possible. Typically, a score in the 500s is considered poor, a score in the 600s is considered good, and anything above 700, excellent. As you might expect, someone with excellent credit can qualify for a much better rate than someone with a poor score. You should be aware of your credit and know the necessary actions you should take to achieve a quality score.
Loan Program
Do you want the lowest rate over a long period of time or for a short period? You're not walking out the door with the lowest refi rate if you ask for a 30 year fixed mortgage. However, you will have a stable, secure loan. Conversely, if you don't mind the risk or don't need long term security, an adjustable rate mortgage will give you a lower rate to start, but could escalate over time. It's important to discuss your goals with your loan officer so you can get the program that best fits you.
Paying Points
An option exists for you to "buy the rate down." This means that you will pay a fee - measured in percentage points of the total loan amount - at closing for a lower interest rate. If you were to pay one point on a $300,000 loan, it would cost you $3,000 at closing. This can be beneficial if you keep the loan for a certain number of years because you will save money in interest with the lower rate that you bought. Check out our "Should I Refinance" calculator to see if you should buy points.
Specials
Sometimes, a lender truly does have a lower refi rate. Lenders will hold specials to drum up business. These are usually short-lived as the lender is looking to reach a sales quota. You can benefit greatly if your timing is right, but make sure you are comfortable that everything is in your favor.
Go ahead and keep looking for the best rate, but remember that it's more important that you match a program that saves you the most money over the life of the loan. Sometimes, this means going with a higher interest rate, initially.
