How to score an ultra-low 30-year mortgage rate when you refinance

·5 min read
How to score an ultra-low 30-year mortgage rate when you refinance
How to score an ultra-low 30-year mortgage rate when you refinance

A new plunge in mortgage rates has given homeowners a fresh incentive to refinance — and potentially save hundreds of dollars a month, maybe thousands over time.

Rates recently parachuted back into the neighborhood of the all-time lows reached earlier this year, after regulators announced they would eliminate a COVID-related fee on refinances. Many lenders had bumped up their mortgage rates as a way of passing the fee along to borrowers.

Now, 30-year fixed mortgage rates have plummeted to an average of just 2.78% in the long-running weekly survey from mortgage giant Freddie Mac, and that's not too far above January's record low of 2.65%. Some lenders are currently advertising 30-year rates at 2.5% and even lower.

If you own your home, you're probably due for a refi: Most homeowners never refinanced over the past year of supremely low mortgage rates, a Zillow survey found. Here are four tips on how to get the best deal when taking out a new 30-year mortgage.

1. Get several mortgage offers and compare rates

Young woman with long dark hair researching mortgage rates on her laptop computer while sitting on couch at home
Rido / Shutterstock
Cast a wide net to find a good rate.

Refinancing into another 30-year loan can be the right choice if your current mortgage is relatively young. You won't be stretching out your interest costs all that much if you've been in the home just a year or two.

Rates have fallen so far that you're an excellent refi candidate if you have a mortgage you took out as recently as the beginning of 2020, when the average 30-year rate was around 3.75%.

But you can't assume that a lender will always present you with the lowest rate that's available. Different lenders can offer the same homeowner vastly different refinance rates.

To find your best refi deal, you've got to shop around and compare rates — not stop your search at the very first loan you're offered.

Hunting for a rock-bottom rate is worth it. A Freddie Mac study found if you get five rate quotes, you'll pay lifetime costs averaging $3,000 less than if you end your search after hearing from just one lender.

2. Spruce up your credit score

A better credit score brings better mortgage rates. Lenders like borrowers whose credit scores are very good (in the 740-to-799 range) if not exceptional (800 to 850).

To get the kind of refinance loan that will save you hundreds every month, you'll need a score of at least 720, according to the mortgage data and technology firm Black Knight.

Don't know your credit score? Today, it's pretty easy to get a peek at it for free.

If you find your credit score needs some help, take steps to raise it:

  • Pay down debt, especially on credit cards. A debt consolidation loan might help you get rid of credit card debt more quickly, and at much lower interest.

  • Don't open new credit cards, but don't close old ones either. Closing accounts can reduce your available credit — which could hurt your score.

  • Get your hands on your credit reports and make sure there are no errors that could be dragging down your credit score. In a recent Consumer Reports survey, one-third of volunteers who checked their credit reports found mistakes.

3. Show a lender you're invested in your home

Bank teller's hands counting dollar banknotes on the table
Maryna Pleshkun / Shutterstock
A bigger down payment can get you a lower rate.

Refinancing homeowners who have healthy amounts of equity in their homes tend to score the lowest 30-year refinance rates.

Equity is the percentage of your home's value that you own. To determine your equity, take the amount you've already paid on your home and divide that by what the house is currently worth. The result — which should be to the right of a decimal point — represents your equity percentage.

To a lender, the ideal refi candidate has at least 20% equity, Black Knight says. If you still have a ways to go to reach the 20% level, you'll want to make a down payment that will put you over the line.

As an added bonus, you won't be forced to buy or keep paying for private mortgage insurance if you've got at least 20% equity in your home.

Private mortgage insurance offers a lender protection in case a borrower defaults. It's not to be confused with homeowners insurance — which offers you protection if your house is damaged by fires, tornadoes and most other types of disasters.

You should already have home insurance — it's vital, and most lenders require it. But each time your homeowners policy comes up for renewal, go online and get a bunch of rate quotes so you can feel confident you're not overpaying for your coverage.

4. Be willing to pay 'points'

The optional fees known as "discount points" are a type of upfront payment that can help you bag a low 30-year mortgage rate. One point equals 1% of your loan amount and can lower your rate by as much as one-quarter of 1 percentage point, say from 3% down to 2.75%.

Jaw-dropping mortgage rates often — though not always — come with points.

"By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time," says the U.S. Consumer Financial Protection Bureau. "Points can be a good choice for someone who knows they will keep the loan for a long time."

You'll need time to break even on the points and other closing costs before you can truly start enjoying the savings from your low mortgage rate.

The CFPB says lenders have their own individual pricing structures, so don't make the assumption that a loan with points will always have the lowest rate out there. You might find another lender offers a loan with zero points and a better rate.

It's another good reason to gather multiple loan offers and review them side by side — to make certain you land the cheapest mortgage you can get.

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