How to Get the Best Mortgage Rates When Refinancing

Many homeowners are refinancing their mortgages to take advantage the lowest rates we’ve seen in decades. How low are they? The going rate for a 30-year fixed mortgage has thus far fluctuated between 5% and 5.2% for 2009 (5.15% at the time this article was published).

But it’s important to realize that you won’t automatically qualify for the best mortgage rates when refinancing your home. Remember the review process you went through when you applied for your original mortgage? Well, you’re going to be put under that same microscope when you refinance your home. And if you want to qualify for the best rates on mortgage refinancing, you’ll need the following three things.

Getting the Best Rates – Three Key Factors

Before we even talk about getting the best mortgage rates on your refinance loan, let’s talk about a situation that is effecting millions of homeowners in the U.S. right now. As a result of the recent housing crash, more than 12 million homeowners are underwater in the mortgage loans, meaning they owe more than the home is worth in the current economy.

So before you start worrying about the best refinancing rates, you need to make sure you can refinance in the first place. You need to make sure you have positive equity. And that brings us to the first item on the list of “ingredients”:

1. At Least 20% Equity

With most lenders, this is something you’ll need just to qualify for a refinance loan. And if you want to get the best mortgage rates on that loan, you’ll certainly need to have positive equity beyond 20%. There’s not much else to say about this item. You either have it or your don’t.

In order to determine how much equity you have, you’ll need to determine the current value of your home. Forget what you paid for it two years ago — a lot has changed since then. Compare your loan balance to the current appraised value of your home, and you’ll know where you stand in terms of equity.

2. An Excellent Credit Score

Good credit has always been a requirement for getting the best mortgage rates when refinancing, and it still holds true today. The only difference is that you’ll need an even higher score to qualify for the best rates in the current economy (than you might have needed a couple of years ago). How high does it need to be? This will vary from one lender to the next, but I’d say you need to have a FICO score of 760 or above to get those top-tier interest rates.

The first step here, obviously, is to find out where you stand. You can get all three of your scores from Equifax, TransUnion and Experian through the credit scores page of this website. Don’t wait for a lender to tell you what your score is. Find out for yourself, and find out today. You need excellent credit (between 750 and 850) to get the best refinancing rates, so you need to obtain this information as soon as possible.

If you find out that your score is low, you can improve it by reducing your debt and paying all of your bills on time. These are the two most important steps to take when improving a credit score, and when combined they will help you achieve success faster than anything else.

3. A Favorable Debt-to-Income Ratio

This is another of the key factors your lender will review when you apply for a refi. Debt-to-income ratio is simply a comparison between your gross monthly income and the amount you pay toward your various debts each month. So if John and Jane gross $7,000 each month, and they pay $1,500 on all of their debts, then their debt-to-income ratio is about 21%.  In other words, 21% of their monthly income goes toward their debt.

In fact, John and Jane are a pretty good model for where you should be with your DTI ratio, if you want to get the best mortgage rates when refinancing. I would recommend 20% or lower. You might be able to get qualified with a DTI higher than that, but you probably won’t get the best rates — and that’s what this article is all about.

Find Your Refinancing Break-Even Point

Up until this point, we’ve focused on what it takes to get the best interest rates when refinancing your home. But I don’t want you to leave this website thinking it’s “all or nothing” — that you have to qualify for the best rates in order to make it worthwhile. That’s not the case. From a purely financial perspective, deciding to refinance comes down to one thing. If you can save more than you spend, then it makes sense to refinance.

In other words, if the money you save by reducing your interest rate exceeds the money you pay in closing costs, then refinancing is a smart move. If you want to learn more about the break-even point, check out this article on refinance closing costs at the Home Buying Institute.