6 ways to squeeze refinance rates down

Posted by  on Oct 20, 2014

The way refinance rates go up and down, it's easy to think that they are completely beyond your control and that refinancing is simply a matter of luck. While it is true that you cannot control refinance rates, to some extent you can make your own luck by squeezing those rates down as far as possible.

Your next mortgage rate is probably going to be with you for a long time, so little things can make a big difference. When you take the savings of squeezing down your refinance rate just a little bit and then project those savings over the 15- or 30-year life of a mortgage, a little extra effort can put a lot of money in your bank account.

Here are some ways you can make that kind of difference by squeezing down your refinance rate:

  1. Spruce up your credit. Paying down credit card debt and addressing any concerns raised on your credit report are examples of efforts you can put in up front that might pay off in the form of a lower interest rate when it comes time to refinance.
  2. Consider an adjustable-rate mortgage (ARM) for short repayment periods. Think you will be moving on or otherwise able to pay off your mortgage in five years or so? Then consider refinancing to an ARM. A 5/1 ARM -- one which won't reset its rate for five years -- should save you about a full percentage point compared to a 30-year mortgage these days. Besides choosing a long initial reset period, you can limit the interest rate risk by choosing an ARM with a relatively small reset cap.
  3. Chose 15 over 30 years if possible. If you can't see repaying your mortgage within five to 10 years, an ARM might be risky but you can still save money by shortening from a 30-year to a 15-year mortgage. This will probably raise your monthly payments, but that may be affordable if you have already paid down your mortgage balance for several years. The payoff is that this should give you a lower refinance rate, and cut the number of years you will be paying interest in half.
  4. Pay off some of your existing mortgage in cash. Looking for a good investment? With deposit accounts paying next to nothing and the stock market looking shaky, your best move might be to put some cash into your mortgage. This will allow you to refinance a smaller amount, and reducing your loan-to-value (LTV) ratio in this way could lower your interest rate.
  5. Don't automatically refinance with your existing lender. You might think that getting approved for refinancing is easier with an existing lender, but lenders often look at a refinance loan as a fresh risk so the approval process is as demanding as ever. This means there is no reason not to play the field.
  6. Compare specific mortgage quotes. When you do shop around, don't just compare widely-advertised rates. This can be a starting point, but before making a decision you should compare quotes specific to your credit situation, location, and LTV ratio.

Even if the average refinance rate represents a savings from your original mortgage, why settle for average? Make the effort to squeeze down refinance rates as much as possible, and you could be rewarded for years to come.

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