Due to high interest rates, fewer people have refinanced their homes in 2023 than at any other time in the past 30 years. However, a refi can still benefit you during a high-interest period. Shortening your repayment term or providing new financial information can get you a lower interest rate than you originally had. If your monthly payments have become too expensive, a refinance can help you lower them. There is no absolute good or bad time to refinance: whether or not it is the right decision depends on your unique financial situation.
This page will walk you through practical ways to lower your interest rate if you decide to refinance.
Will Mortgage Rates Go Down in 2023?
Mortgage rates could dip slightly over the next few months, but most forecasters do not anticipate a significant drop.
Mortgage rates fluctuate based on a number of broader economic factors. A primary driver is the Federal Reserve’s interest rate. The Fed’s interest rate only determines the interest charged to banks taking loans from the government, but those rates have a domino effect on loans at every level. When the Fed lowers its interest rates, interest rates for other loans, including mortgages, tend to drop. When the Fed charges more interest, so do other lenders.
Some forecasters, such as Freddie Mac, believe the Fed is unlikely to raise interest rates again this year after already hiking them significantly over the summer. Mortgage rates were above 7% in mid-August, and Freddie Mac predicts they will not drop below 6% this year.
Other forecasters, such as the Economic Forecast Agency, foresee another Fed rate hike, which would mean increased mortgage rates. They predict that rates for 15-year mortgages will rise to 6.71 in December and 30-year rates will increase to 7.22.
It is impossible to say with absolute certainty how mortgage rates will change over the coming months. However, many economic forecasters see them either staying the same or slightly increasing.
How To Get the Lowest Rate For Your Refinance
Raise your credit score
Your credit score tells potential lenders how likely you are to stay on top of your credit. Naturally, creditors will be more likely to loan to you if your credit score is high. A FICO score of 670 is considered “good.” Any lower, and lenders will see you as unlikely to repay your loan in full and on time.
You can improve your credit score by paying off existing statement balances for credit cards, paying off debts, and refraining from opening new lines of credit. By limiting your monthly credit card expenditures to those you can afford to pay in full by the due date and using only a small portion of your available credit, you can gradually improve your credit score.
Lower your debt-to-income ratio
Your debt-to-income ratio, or DTI, is another sign telling potential creditors how likely you are to remain in good financial standing. If you generate nearly as much debt as you earn on a monthly basis, lenders will see you as high-risk and be unwilling to loan to you. Creditors typically look for a DTI under 43%, though lower is better.
You can lower your DTI by using your credit card less and by closing any outstanding debts that you can afford. If your student loan payments are affecting your DTI, see if you qualify for an income-driven repayment plan, which will lower your monthly payments.
Double–check your credit reports
Credit reporting companies sometimes make mistakes in their accounting that can cause your credit score to be lower than it should. Common errors include duplicate accounts, inaccurate balances, and on-time payments appearing late. A bad credit score will hurt your refinance, so it is important to correct these errors when they come up. Request a copy of your credit history and ensure that all the reported data is accurate. If you spot any mistakes, open a dispute with your credit recording company.
Compare fixed and variable interest rates
When refinancing your home, you will have the option of choosing a fixed or variable interest rate. A fixed interest rate will allow you to pay the same interest rate for the duration of your mortgage, while a variable rate will change according to various economic factors.
Fixed and variable interest rates each have benefits and drawbacks. Fixed interest rates are safer, but if you refinance while interest rates are peaking, you will be locked into a higher interest rate until you either pay off your mortgage or refinance again. A variable interest rate can save you money if national interest rates dip, but an unexpected spike could leave you paying a higher interest than you planned for.
Fixed interest rates are safer than variable rates because you can effectively account for them in your financial planning. While you risk paying more in the long term than you might with a variable rate, you can be more confident that you will be able to afford your payments in the future.
Do not roll closing costs into your mortgage
Your lender might offer you the option of incorporating the closing costs of your refinance into your mortgage. While this option reduces your upfront expenses, it will also increase your loan, which means higher interest payments for the duration of your mortgage. Paying closing costs upfront incurs a larger immediate cost, but it will save you money in the long run.
Consider a 30-year term
Most borrowers opt for a 15-year or 30-year term for their mortgage. 15-year mortgages can be appealing to borrowers who can afford the monthly payments, as they require a shorter commitment and often come with a lower interest rate. If you are refinancing a 15-year mortgage and looking to lower your monthly payments, a 30-year mortgage may be the best decision for you.
Shorter mortgage terms offer higher monthly payments in exchange for less long-term interest, while long terms mean lower monthly costs and more interest. However, if you take out a 30-year mortgage, you can increase your monthly payments to match those of a 15-year or shorter mortgage, saving you from additional interest. If, for whatever reason, you become unable to afford those higher payments, you will only be held responsible for your minimum payment. In the case of a 15-year mortgage, falling short of your minimum payment would lead to costly late fees, a lower credit score, and even foreclosure. By paying above the minimum for a 30-year mortgage, you can reap the benefits of a 15-year term without running as many risks.
How To Find a Mortgage Refinance Company
Expertise.com’s directory of mortgage refinance companies can help you find the refinancer that best fits your financial needs. Before you agree to any loan, make sure that you fully understand the terms of your loan. If you are unsure what type of refinance is best for you, Expertise.com can help you find a financial advisor to help with your decision.
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