(Updated October 2014)
Even with all the home mortgage lenders there are out there, the chances are good that you won't find the best refinance rates just sitting on your couch. But thanks to the Internet, you don't have to travel far from that comfy couch to get a great deal on a mortgage refinance. Here are some helpful tips for finding a rate that fits your finances:
Shopping for mortgage rates
If you're going to dig up the best refinance rate, look around. Go online to see what lenders are offering. Don't limit yourself to just local lenders, but national and regional ones as well. These days, it isn't even necessary for a lender to have an office in your community or even in your state in order to refinance your mortgage. Inquiries and applications can be made online, documents can be delivered by mail and the loan closing can be conducted at the office of a local attorney or other licensed agent.
That being said, don't overlook the smaller, local lenders either, particularly if you've been having trouble qualifying for a refinance with one of the big banks. Local lenders may be more flexible on their loan requirements and usually have a better understanding of the area's real estate market, giving them a more nuanced understanding of risk. If you don't have a "cookie-cutter" refinance - perhaps your home is a unique property or you have an irregular income - a small or specialty lender may be the right choice for you.
Don't fixate on rates
A key mistake many make when refinancing or shopping for a purchase mortgage is that they focus solely on rates. But mortgage rates are only part of the picture. You also need to take into account closing costs, which can have the same effect as boosting your mortgage rate by a quarter to half a percentage point or more.
Closing costs can range from 2 to 6 percent of the loan amount, depending on the lender, where you live and what options you choose. Lenders tend to structure their closing costs differently, which can make it hard to make comparisons among them - they may have different fees they charge, the amounts they charge may vary. They may even use different names for the same fees.
The point is that a loan offer with a low rate but high fees could cost you more than a competing offer with a somewhat higher rate and lower fees. So you need to figure the cost of the fees into the cost of the loan. Something that helps you do this is the APR, or annual percentage rate. The APR is a way of expressing the full cost of the loan as an interest rate - the lower the APR, the lower the overall cost of the loan, generally speaking.
When shopping around, it's good to make a comparison chart comparing offers from various lenders, and include not only rates, but the closing costs, as well. You'll also want to look at discount points, which are a special type of closing cost that lets you buy down the interest rate by paying a higher fee up front. These can offer a good value if you expect to have the loan for a long time, but are less attractive if you plan to pay off the loan or refinance again within a few years.
A little knowledge; a lot of help
Before you start your search for the best mortgage refinance rates, you may want to get an overview of some of the differences between mortgages. Here are a couple of general concepts to get the ball rolling:
1 - 30-year fixed-rate mortgages are the most popular type for people buying a home, but may not be the best choice for refinancing. For one thing, if you've been paying on a 30-year mortgage for several years, then refinance into a new 30-year loan, you've just postponed the day you pay the mortgage off. Stretching out your mortgage a few more years also increases what you'll pay in interest over the life of the loan.
On the other hand, if money is tight and you need to reduce your monthly payments, refinancing into a new 30-year mortgage can help you do that.
2 - A 15-year fixed-rate mortgage is a popular option for refinancing. For one thing, the rates are significantly lower than on a 30-year loan. Second, you also pay the loan off much faster - which makes them a good choice if you've been paying on a 30-year loan for a few years and want to hasten the day you pay the whole thing off.
If a 15-year mortgage is a bit too short and would result in payment that are higher than you'd like, a 20-year fixed-rate loan is another option. The rates aren't quite as on a 15-year loan, but the monthly payments will be lower and you can avoid stretching your mortgage back out to 30 years.
3 - They've lost some of their luster in recent years, but adjustable-rate mortgages (ARMs) can be a good refinance choice for some borrowers. Unlike fixed-rate mortgages, the interest rate on ARMs varies over time, depending on market conditions. But the initial rate is lower than on a fixed-rate mortgage, which can make them useful cash-management tools for some borrowers. They're also a good choice for someone who expects to sell the home or pay off the loan in a few years, and who don't need to lock in a rate for 15 or 30 years.
Playing the rate game
Mortgage rates go up and down, depending on various factors. Federal Reserve policies can have a big impact, as the Fed can push rates up or down in response to what it sees as economic or inflationary conditions. National and global developments can have an impact as well. The general rule is, things that are seen as good for the economy push rates up, whereas bad economic news or international crises push rates down, as investors turn to safe havens for their money
When it comes to refinancing a mortgage, the key thing to remember is that you can't predict what rates are going to do over the next few weeks, months or even years. Forecasters have been predicting for years that 30-year rates would soon head back above the 5 percent mark; as of late 2014, they remained firmly established in the lower fours.
The moral of this story don't wait for rates to move down to some magic target figure. If you think you can benefit from refinancing at today's rates, act now - rates can rise just as easily as they can go back down again. Get on the Internet and do some legwork. With a little digging and a lot of number crunching, you won't find the lost ark; but you should come away with a great rate.