Are you frustrated shopping for a new home loan because the refinance rates you’re being quoted are higher than what lenders are advertising? If so, the likely culprit is your credit score. Did you know that advertised refinance rates are usually based on having a credit score of 720 or higher? Here are several tips before you refi to improve your credit score and make sure you’re getting the lowest refinance rates.
Refinancing rates crept up slightly with the New Year; however, according to the Mortgage Bankers Association demand will remain strong throughout the year. This means there will be a lot of opportunities for you to take advantage of low refinance rates, even if you have credit challenges.
How To Get The Lowest Refinance Rates Possible
If you want the best possible deal on the lowest refinance rates the first step is to get your finances in order starting with your credit reports.
Your credit report is a record of your past finances including car loans, credit card payment history including any collection activity or liens. Credit reports typically go back for seven years. Your credit score is derived from the contents of your three credit reports.
The better (higher) your credit score, the closer your refinance rates will be to what you see lenders advertising. That’s why it’s worth investing a little bit of your team cleaning up the contents of those credit reports.
Just why is that mortgage rate so low?
In this article I’m talking about getting the lowest rates you see lenders advertising. There is a catch when shopping from today’s best mortgage lenders. There’s always a catch right?
When you’re shopping for refinance rates you’ll find that the lowest mortgage rates include discount points. That means you’re paying a fee to get your interest rate that low. One discount point is typically one percent of your mortgage amount and lowers the interest rate by .25%.
If the mortgage rate you’re being quoted requires 1.5 points on a $200,000 home loan you will be required to pay $3,000 at closing just to get the refinance rates you’ve been quoted. Should you pay discount points to lower your interest rate?
Most homeowners want to avoid paying discount points when refinancing. Mortgage rates are still near historically low levels and the amount of time it takes to recoup the fee you’re paying generally makes paying points a bad idea.
When shopping for the lowest refinance rates ask your loan officer for zero point quotes. If you’d like to see how paying this fee affects your payments there is a table on page three of your Good Faith Estimate.
If you haven’t already done so you should head over to the government mandated website AnnualCreditReport.com. The Fair Credit Reporting Act requires the three credit bureaus (Equifax, TransUnion and Experian) to provide you a free copy of your credit report every year. This credit report does not include a credit score; however, if you’re a member of a credit union most offer low-cost monitoring services that include access to your credit score.
When you apply for mortgage refinancing the lender runs your credit and reviews your middle credit score. Suppose your three credit scores are 640, 660, and 720. The lender will base your refinance rates on the 660 credit score. Mortgage lenders use the “middle” score and do not average the three.
How To Improve Your Credit Scores
The most important thing you can do to improve your credit score is to pay all of your bills on time. In the short term you can boost your credit score by paying down the balances on your credit cards below 30% of your credit limit.
While you’re reviewing your credit reports if you find mistakes or inaccurate information each credit agency accepts online disputes you can use to have the information removed. Removing inaccurate negative information from your credit reports can significantly improve your score.
Shop Smartly For Refinance Rates
Many homeowners refuse to provide lenders with their Social Security number when shopping for the lowest refinance rates for fear of damaging their credit score when that lender runs their credit.
It is true that having a mortgage lender run your credit will lower your credit score; however, this is the only way to get an accurate quote based on your finances. If you don’t provide your Social Security number when requesting refinance quotes you’re going to wind up with someone’s guess of what your interest rate should be.
If your credit isn’t where you’d like it to be you risk losing your quoted rates when the lender does run your credit score.
The best strategy for minimizing the impact to your credit score is to limit all of your refinance rate quotes to a two week period. If you do this you’ll only get dinged for one credit inquiry. Always provide your Social Security number when securing mortgage quotes to make sure the quotes you’re getting are accurate.
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