Mortgage refinancing just got more attractive, thanks to the combination of a plunge in mortgage rates in recent weeks and the end of a much-maligned federal fee on refis. The average rate on a 30-year refinance fell to 3.03 percent this week, down from 3.11 percent last week, according to Bankrate’s national survey of lenders.
Many in the mortgage industry expected the refinancing boom to fade away as the economy recovered from the coronavirus recession. Instead, the spread of the Delta variant of COVID-19 has roiled financial markets.
For homeowners, there’s a new opportunity to cash in on low refi rates. “A lot of people who may have thought they missed the boat the first time around may be interested now,” says Sebastian Hart, senior manager of capital markets at mortgage lender Better.com.
Mortgage refinancing rates are moving in borrowers’ favor for a couple of reasons. In one driver, mortgage regulators said last week they were ending a widely criticized surcharge on refinances. That announcement from the Federal Housing Finance Agency came Friday morning, and by Friday afternoon, lenders were dropping refi rates.
“As soon as this announcement was made by the FHFA, lenders were hot on it,” says Robert Humann of Credible.com.
Homeowners have responded, too, by taking advantage of the drop in rates. “Our pipeline jumped 20 percent in a week,” says Gordon Miller, owner of Miller Lending Group in Cary, North Carolina.
Mortgage rates drop across the board
The federal fee of 0.5 percent of the amount of a refinance was paid by lenders rather than borrowers. In response, lenders last year boosted refi rates by about 12.5 basis points, or 0.125 percentage points.
Some lenders slashed rates on 15-year fixed-rate loans to less than 2 percent, and they dangled deals on 30-year refinances of well below 3 percent. The moves might rekindle a refinancing boom that was in full swing earlier this year.
The other factor pushing mortgage rates down is the resurgence of the coronavirus, which is sparking new questions about the future of the economic recovery. Reflecting those concerns, the yield on 10-year Treasury bonds has fallen to 1.28 percent as of Wednesday. The 10-year Treasury — a key benchmark for 30-year mortgage rates — stood at 1.5 percent a month ago.
How to refinance your mortgage
Step 1: Set a clear goal
Have a compelling reason to refinance. It could be cutting your monthly payment, shortening the term of your loan or pulling out equity for home repairs or to repay higher-interest debt. You may also want to roll your HELOC into a refi.
What to consider: If you’re cutting your interest rate but resetting the clock on a 30-year mortgage, you might pay less every month but more over the life of your loan. That’s because amortization schedules front-load interest charges in the early years of a mortgage.
Step 2: Check your credit score
You’ll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you — and the better your chances of underwriters approving your loan.
What to consider: Lenders became stricter about extending credit during the pandemic, so the typical mortgage borrower’s credit score is higher now than ever. While there are ways to refinance your mortgage with bad credit, it can make sense to spend a few months boosting your credit score before you start the process.
Step 3: Figure out how much home equity you have
Your home equity is the value of your home in excess of what you owe your mortgage lender. To find that figure, check your mortgage statement to see your current balance. Then, check online home search sites or get a real estate agent to run an analysis to find the current estimated value of your home. Your home equity is the difference between the two. For example, if you still owe $250,000 on your home, and it is worth $325,000, your home equity is $75,000.
What to consider: You may be able to refinance a conventional loan with as little as 5 percent equity, but you’ll get better rates and fewer fees (and won’t have to pay for private mortgage insurance, or PMI) if you have more than 20 percent equity. The more equity you have in your home, the less risky the loan is to the lender.
Step 4: Shop multiple mortgage lenders
Getting quotes from multiple mortgage lenders can save you thousands. Once you’ve chosen a lender, discuss when it’s best to lock in your rate so you won’t have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether they’ll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
Step 5: Get your paperwork in order
Gather recent pay stubs, federal tax returns, bank statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose your assets and liabilities upfront.
What to consider: Having your documentation ready before starting the refinancing process can make it go more smoothly.
Step 6: Prepare for the appraisal
Mortgage lenders typically require a mortgage refinance appraisal to determine your home’s current market value.
What to consider: You’ll pay a few hundred dollars for the appraisal. Letting the lender know of any improvements or repairs you’ve made since purchasing your home could lead to a higher appraisal.
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How to improve your credit score in 2021: Easy and effective tips
If you’ve ever wondered “What is my credit score?” it’s probably time to find out. Having a good credit score can make life a lot more affordable. If you’re about to buy a house or car, for example, the higher your credit score is, the lower your interest rate (and therefore, monthly cost) will probably be.
Your number may also be the deciding factor for whether or not you can get a loan and ultimately determine if you are even able to buy something you want or need.
So, yes, the goal is to have the highest possible credit score you can, but increasing the number doesn’t just happen overnight. There are important steps to take if you want to increase your score, and the sooner you start working on it, the better.
“If you’re trying to increase (your credit score) substantially to accomplish a goal, you’re really going to have to have as much lead time as possible,” said Thomas Nitzsche, director of media and brand at Money Management International, a nonprofit financial counseling and education provider that advises people on how to legally and ethically improve their credit score on their own.
If you have fair credit and you’re trying to improve the number for a house purchase, for instance, you’ll want to start working on it at least a year in advance, he explained to TMRW.
But even though that sounds like a long time away, you can (and should!) start doing things right now to bump that number up. Below, see seven things you should do — and not do — to help improve your credit score:
1. Review your credit report
The first thing you’ll want to do is pull up a copy of your current report so you know where you stand. You can get free reports from all three agencies — TransUnion, Experian, and Equifax — at annualcreditreport.com. Nitzsche said it’s important to take a moment and understand the financial snapshot of where you are today and where you want to be.
You’ll also want to take some time and look for any errors on your report, which could negatively impact your score. “If your name is misspelled, that’s not going to hurt your score,” he explained. “But if you see a late payment or missed payment (that’s in error), or maybe you have an account that should be reporting but isn’t, then that’s a problem and that will impact your score.”
If there is an error, you should dispute it and try to provide as much proof as you can.
One other thing: You can also ask a creditor to remove an issue if it’s been corrected (i.e., if you paid off a collection debt). Nitzsche said it doesn’t hurt to ask and the worst thing they could say is no.
2. Have good financial habits
“The biggest part of your credit score is payment history, so the most critical thing is never missing a due date,” Nitzsche said. Set up a monthly autopay or add all due dates to your calendar so you never miss a bill.
You can also achieve a higher score when you mix different types of accounts on your credit report. It may seem counterintuitive to get extra points for having debt in the form of student loans, mortgages and auto loans, but as long as you’re paying them off responsibly, it shows that you’re reliable.
3. Aim to use 30% or less of your credit at any given time
Know your credit card limit, and try not to use any more than 30% of that number each month, otherwise your score could lose points for too much credit utilization.
Another thing you can do is ask your bank to increase your limit. “That will give you more flexibility to spend more,” Nitzsche said. You could also pay it off twice a month to keep the balance low. But he does warn that you never know when the balance is going to be reported to the bureau. It can happen at any point during the month, so it might be the day after you make the payment or the day before. “You don’t necessarily want to use the card and pay it the next day because that doesn’t give the bureau the chance to know that you’re using it,” he said.
4. Avoid requests for new credit
If you’re looking to increase your score around the time you want to buy a house or car, you won’t want to open up a new line of credit, like a retail card, credit card or loan. That’s because “hard” credit inquiries like those can lower your score, and sometimes it comes down to a few points over whether you’re approved or what your rate will be, Nitzsche said.
“Soft” credit inquiries, like when an employer checks your credit or when you pull your own report, won’t affect your score.
5. Keep all accounts open, even ones you don’t use anymore
Even if you don’t use that credit card from college, it’s a good idea to just keep it open because closing it could hurt your score. Nitzsche explained that you’ll be dinged some points for each account that is closed. If you want or need to mentally break up with a card, just cut it up instead.
6. Build your credit if needed
If you haven’t established credit yet, you might not even exist … in the credit report space, that is! “If someone has never fallen in delinquency on any subscriptions or utilities or never had collections on anything and they have not utilized credit cards or loans in the past seven to 10 years, they may not have a credit profile at all,” Nitzsche said. “That presents a challenge when you want to buy a home.”
If this sounds familiar, you may have to get a secured credit card where you put down a deposit, he advised. “You still have to make payments and use it responsibly. Not all banks offer them but you can usually check with your local bank or credit union.”
7. Reach out for help
There are many apps and credit-monitoring services that can help you stay on top of your credit score. You could also reach out to a professional credit counselor who can help you navigate your specific situation. (Here’s a good resource about finding a reputable service.)
One last thing: Nitzsche warned that everyone should beware of credit repair scams that claim to be able to increase credit scores for an advance fee to get accurate negative information removed (even temporarily) from credit reports.
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