What’s your rate for a refinance? That is one of the most common questions asked to a loan officer. There is no correct answer. Pick a number, and you can probably get that rate (within reason). However, it may cost you an arm and a leg.
So what should you ask? That all depends on what you are trying to accomplish, what your goal is in refinancing your mortgage. Are you trying to save money per month, are you trying to pay your mortgage off as soon as possible, are you trying to get cash out to pay debt off or pay off a second (2nd) mortgage, the list goes on and on.
Here is a brief primer on some of the items taken into account to determine your interest rate and the associated closing costs when you refinance your mortgage:
- Your credit score plays one of the most important roles. Depending on the mortgage program (Conforming, FHA, VA, and USDA) and the lender, you will incur different adjustments based on your credit score and the percentage of your home’s value you plan on financing. A borrower with a 755 credit score who is financing 60% of their homes value will incur little to no adjustments, whereas a borrower with a 640 credit score who is financing 90% of their homes value would incur significant adjustments.
- The percentage that you finance (compared to the home’s value) plays an important role. See above.
- The type of refinance that you are seeking will also come into play. A homeowner who is just paying off their first mortgage will have fewer adjustments than a homeowner who is paying off their first mortgage and getting $10,000 cash out. A cash-out refinance is viewed as more risky by the lenders.
- What State the property is in. Some lenders have adjustments that are associated with the State the property is located. Someone that is refinancing their home in Ohio may incur an adjustment with Lender A, whereas if the property was located in Kentucky they may not.
- What do you want your closing costs to be? Wait, isn’t that what your loan officer is supposed to tell you? Not necessarily. Generally on a lenders rate sheet, there will be a list of interest rates, each going up by 0.125%. Along with that interest rate is the associated credit that the lender will provide the homeowner to cover their closing costs. The higher the interest rate, the larger the credit.
A homeowner with a 755 credit score who is just refinancing their first mortgage and wants NO CLOSING COSTS would have a higher interest rate than a similar borrower who was OK with $2,500 in closing costs.
As you can see there are a number of different items that go into determining the interest rate for a refinance. This is where a good Loan Officer comes in handy. They can help you answer the necessary questions, and then provide you with options so that you can make an educated decision.
Keep this in mind the next time you call a mortgage company and want to ask “What’s your rate?”
