If you are considering mortgage refinancing, there are several steps you can take to qualify for a better mortgage rate. Many people will tell you comparison shopping is the most important aspect of qualifying for a great rate; however, comparison shopping is only one aspect of the equation. Here are several tips to help you qualify for a better interest rate when mortgage refinancing.
I. Boost Your Credit Score
Mortgage lenders use your credit score to determine how much of a risk you are for a mortgage loan. Your credit score is derived from your credit reports maintained by the three credit reporting agencies: Equifax, Experian, and Trans Union. The first step in improving your credit score is to request copies of your credit reports and carefully check for any errors or negative information.
Your credit score relies heavily on your payment history; 35% is based solely on making on time payments to your existing creditors. If you have credit problems in your past be upfront with your lender and explain why the payments were late. Any documentation you can provide to support your explanation will help your cause.
II. Consider Buying Your Mortgage Rate Down By Paying Points
Most mortgage lenders will lower your mortgage rate in exchange for points. A “point” is one percent of your mortgage rate in the form of pre-paid interest due at closing. The more points you pay upfront, the more your interest rate goes down. When deciding if you will benefit from paying points determine how long it will take you to recoup the expense from the amount you are saving with a lower mortgage payment. This will tell you the “break even point” and if paying this fee makes sense for you.
III. Avoid Paying Yield Spread Premium
Mortgage companies mark up your mortgage rate because the wholesale lender pays them a bonus for overcharging you. For every quarter percent you agree to overpay the lender pays them one percent of your loan amount in addition to the origination points you already pay. How can you avoid paying this retail markup of your interest rate? Ask your mortgage company to see the mortgage rate guaranteed by the wholesale lender and tell them you will not pay any retail markup of the interest rate from the wholesale lender. If the mortgage company refuses to show you the rate sheet find another mortgage company that will.
You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for our free, six part video tutorial.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
