When you refinance your home you do so hoping to get the best deal possible at the lowest rates possible, but refinancing isn’t a simple matter of contacting a lender and getting the rate that everybody else is getting. Refinance rates today aren’t cookie cutter. In fact, they are very much customized per person depending on a variety of factors. Here are six of those factors that can and more than likely will affect the rate you are given.
The Real Estate Market and Your Lender
The most widely known factor that has the biggest impact on refinance rates today is the real estate economy. Interest rates rise and fall with the ebb and flow of the market. One day they may be at an all time low and the next they’ve jumped two points and you’re looking at a significantly higher rate. Timing your refinance can help you get the best rate possible. The time to get a refinance is when rates drop and they are at a significant low. If you can lock in those low rates before they jump, you’ll do yourself a big financial favor.
An interesting point regarding the market is that the refinance rates today are set by the federal government. They put the base rate and from there lenders and financial institutions add their own points and fees, driving up the rate. Typically if the market is in a good place, rates will be lower, but when things appear to be going south, the rates might increase.
There are many lending options to the homeowner. Some of these are banks and credit unions, others are private lenders, and for some the finance company is preferred. Each of these lenders will start with the base established by the federal government and then determine the rate from their own set of criteria. Then, they will advertise their lowest rate to bring customer’s in. This doesn’t mean you’re going to get the lowest rate, it just means that it’s their base rate that they are offering. The rate you ultimately end up with will be swayed by a few more factors.
Refinance Rates Today and Your Finances
Lenders take the national base rate and adjust it, creating their own base rate. When a homeowner approaches them for lending, they adjust the rate once again and customize it to the homeowner. This is where your credit score, debt-to-income ratio, and overall financial health come into play. As a general rule of thumb, those people with a higher credit score typically secure lower rates. This is also the case if you have a steady income and a debt-to-income ratio that is fairly low. The lender’s want to know that you are a low risk. The lower risk you appear to be, the better the interest rate.
Your rate is also going to be affected by the closing costs and fees associated with the refinance. Typically, a refinance will cost the homeowner a fair amount of money, usually about 3% of the loan value just in closing. In addition to these are the other fees associated with the refinance and any penalties that may be incurred from the original mortgage. All of these factors come into play when determining your rate. In addition to this are the points that you can pay up front. A point is a certain percentage paid on the loan at the time of closing in addition to the closing fees. When you pay points you pay more up front but the interest rate typically drops. So generally speaking, the more you pay up front both in closing and points, the lower your rate will be. For some homeowner’s it’s nearly impossible to pay anything up front, including the closing fees. When this is the case those costs are often rolled into the loan and the homeowner pays them down with the mortgage, usually at a higher interest rate.
As you can see there are many contributing factors to a higher interest rate and all of them are taken into account by the lender when a homeowner applies for a refinance. To clarify for you, some of the factors that you’ll be dealing with are the economy and the base rate established by the government, your finances and credit score, the lender’s base rate, any fees and penalties associated with the loan, and the amount of monies paid up front both in closing costs and points. All of these and any additional factors that may come up should be discussed with the lender so you know exactly what you’re paying for and why you’re paying it.