Get Ready to Refinance with a Rate Drop of 0.25% Or More
If mortgage rates decrease, you should take advantage of the opportunity to refinance. You need to be ready to move fast when you see a rate drop of 0.25% or more in this crazy market with rates up one day and down the next.
Rates have been unpredictable so waiting for rates to drop a lot for a one-time refinance might be impractical or impossible. If rates drop enough for reasonable saving and you don’t pay closing costs it is often worth the effort to grab the savings now and be ready if you can do it again. With larger loan amounts 0.25% might be a start but 0.5% usually will provide some good savings.
- Do not pay closing costs and save from day 1!!. Most often my customer say they want to reduce their payment by $1,000 a month or more and that is their target for refinancing. I think the better question is at what point is the savings too good to pass up? Is saving $100/month, $1,200 per year, and, $12,000 over 10 years, worth the effort? Is $150, or $250 per month the better target? A $500,000 loan with a rate reduction of 0.5% will save you $2,500 per year. I have many stories of customers who could have secured significant savings but waited for the rate to drop a little more only to see the rates jump back up and lose out on all potential savings. Hoping to save another $50 per month by waiting while risking the $250 savings that can lock in right away is a bad plan. Lock in when the rates drop to secure your savings and if you can do it again later with another drop you win, win!! When you refinance, choose a $0 loan option and you will save money from day 1. You may have the option to roll closing costs into your mortgage but choosing a no-cost loan will be your best option and if rates drop further, you can refinance again.
- Raise your credit score. There is a lot of poor information suggesting ways to improve your credit. In the short term, there are only a few good ways to increase your credit score. Pay down your balances – If you have savings, pay down or pay off your credit balances. You can even use a credit score simulator to pinpoint what to pay off and how much to pay to give you the biggest boost. Sometimes paying just a portion of certain balances will benefit you more than paying all of just one account. Do not use several different cards every month for small purchases – Nowadays using several different cards for rewards is a regular practice but credit agencies have started to lower customer’s credit scores for using too much credit. When you plan to apply for a home mortgage start using just one card for all your purchases instead of spreading the same purchases across several rewards cards. Once your loan is closed you can resume your typical spending to maximize your credit card rewards. Pay off your credit card balances early – If you receive your statement and pay it off monthly, consider paying it as soon as you receive the statement rather than waiting for the due date. Your credit card company reports your balance to the credit bureau every month. If you pay your bill the day you receive your statement, by the time your credit card reports your balance to the bureau it may already show $0 from your early payment. If you wait until the due date to pay, the high balance is likely to be reported and can lower your credit score.
- Build up home equity. You cannot refinance if you do not meet the minimum equity requirement. Focus on building up equity in your home. If you have made any home improvements keep a list and the cost to present to the appraiser to boost your appraised value. You should also include any DIY projects and the estimated cost you saved by doing it yourself. You can also make extra mortgage payments if you can afford them or even make a lump sum payment to reduce your loan to secure a better rate. Interest rates typically get better as your loan amount decreases and your home equity increases. If you are close to an interest rate improvement threshold you might choose to pay down your loan a little. I have seen customers within a few thousand dollars of 20% equity or the Conforming loan amount cutoff pay just a little more to remove mortgage insurance or secure the next loan level for a better rate.
- Get your documentation in order. When you originally applied for your mortgage, you needed to provide the necessary documentation to get approved. You will need to do the same thing when you apply for a mortgage refinance. Hopefully, you saved copies of your documents somewhere secure, but convenient, which would save you some time. But if not, you will need to go about gathering what you need. If you require your COE for a VA IRRRL, that is something that your mortgage company will be able to help you with.
Refinance in Washington State or Colorado
By following the advice above, you can make sure that when the right moment comes along for refinancing, and rates are good, you will be ready to quickly seize the opportunity.
Blue Square Mortgage is based in Seattle and works with homebuyers and homeowners throughout Washington State and Colorado.
If you have questions about refinancing or are ready to refinance, please give us a call at (206) 352-6453 to schedule your consultation. We look forward to helping you get a mortgage with competitive rates.
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