Freddie Mac, a government-backed entity that oversees the mortgage market, anticipates a decrease in rates to 6.2% by the close of 2023. Throughout the current year, mortgage rates have fluctuated between 6% and 7%, primarily staying in the mid-6% bracket. The existing mortgage rates forecast suggests a minor downward shift, but rates will still be high relative to previous years.
In the face of ongoing inflation, potential rate increases from the Federal Reserve are a concern. However, a rise in the federal funds rate by the Fed doesn't necessarily mean mortgage rates will also increase. Federal Reserve Chairman Jerome Powell projected in late June that housing inflation might decrease in the next 12 to 24 months. Consequently, homeowners burdened with rates of 7% or more could have a fair opportunity to refinance to a lower rate this year.
Previously, a credit score of 740 was sufficient to obtain the lowest interest rates on conventional loans. However, the benchmark has now risen to 780. You can find tips on how to enhance your credit score online.
To get the best interest rate on a conventional loan, you should strive for a credit score of 780 and make a down payment of at least 25%. The loan-to-value (LTV) ratio, which indicates the percentage of your home's value you need to borrow, significantly influences the interest rates you're offered. Lowering this ratio can lead to more competitive rates.
Lenders calculate your debt-to-income (DTI) ratio by dividing your total monthly debt, including your mortgage payment, by your pre-tax income. They typically prefer a maximum DTI ratio of 43%. Using a debt consolidation loan, a debt consolidation calculator can help you determine how much you could potentially reduce your monthly payments.
If you're planning to relocate in a few years, an ARM loan, which offers a lower initial rate for a certain period, might be a good option. If you can sell the house before the initial rate expires, you could save a significant amount on interest compared to a fixed-rate loan.
Lenders usually offer lower rates for shorter terms, such as 15-year loans, which are a popular alternative to 30-year mortgages. Although the monthly payment will be higher, you could save a substantial amount over the course of the loan. A mortgage calculator can help you understand the potential savings of different loan terms.
A mortgage point, which is an upfront fee equal to 1% of your total loan amount, can help you secure a lower interest rate. For instance, one point would cost $3,000 on a $300,000 loan. Each mortgage point can typically reduce your rate by 0.125% to 0.25%. To determine the exact cost of your mortgage point, refer to Page 2, Section A of the loan estimate provided by your lender.
Comparing offers from multiple lenders can save you a significant amount of money. A study found that homebuyers in the largest metro areas saved an average of $63,151 over the life of their loans by comparing offers. If you don't shop around, you miss out on the chance to find out about special deals on specific loan programs and to negotiate for a better mortgage rate using your offers as leverage.
If you decide to refinance, ensure that any new loan you're considering will truly benefit you financially, and aligns with how long you plan to stay in your home.
To find the best refinance rate, it's recommended to shop around and consider factors other than just interest rates when choosing a refinancing loan. This includes checking your credit reports and scores, gathering quotes or loan estimates from multiple mortgage lenders, comparing APRs instead of just interest rates, reviewing the "Projected Payments" section of your loan estimate, and budgeting enough cash reserves to cover your refinance closing costs.
Mortgage refinance rates usually fluctuate in sync with purchase mortgage rates, albeit being slightly more costly. However, refinance rates vary from lender to lender, which is why it's crucial to shop around and find a rate that's competitive enough to replace your current mortgage rate.
Refinancing your mortgage means obtaining a new home loan to replace an existing one. A mortgage refinance can help you save money by reducing your interest rate, shortening your loan term, and providing you with extra funds to put toward your financial goals.
However, before you proceed, ensure that you've prepared yourself for a successful refinance by having a goal and a plan.
The pros of refinancing include the possibility of getting a lower interest rate, changing to a shorter loan term, getting a lower monthly payment, reducing or eliminating your private mortgage insurance if your home value has increased, and accessing a large lump sum of cash that can be put toward other financial goals. The cons include having to pay refinance closing costs, pushing out your loan payoff date if you refinance into a loan with the same term as your existing loan, potentially stretching your budget too far if you refinance into a shorter loan term, not breaking even if you move or sell the home too quickly, and reducing the amount of equity you have in your home if you borrow against it when refinancing.
The most common types of mortgage refinance options are offered by conventional lenders, as well as lenders approved by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA).
As of May 1, 2023, conventional loan borrowers with certain characteristics may face additional charges or rate increases.
To refinance your mortgage, determine your refinancing "why", gather information about your home's value, apply with at least three to five refinance lenders, lock in your mortgage rate, and close on your refinance.
You should refinance when you're sure to see a long-term financial benefit. You might refinance to get rid of private or FHA mortgage insurance, shorten your loan term, or for many other reasons, but you should only do so if you understand when you'll break even on the refinance and how the changes in your payment amount will affect your monthly budget.