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Mortgage rates have declined in recent months, and with the potential for a Federal Reserve rate cut this fall, it’s smart for homeowners with high interest rates to start preparing for the opportunity to refinance, experts say.
Last week, mortgage rates slightly edged higher. According to the Mortgage Bankers Association, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances, $806,500 or less, increased to 6.68% from 6.67% for the week ending Aug. 15.
But generally, rates have been edging down, reaching a 10-month low earlier in August.
Lower mortgage rates often result in lower borrowing costs for home loans. Many homeowners have already jumped on the opportunity in recent weeks.
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The refinance share of mortgage activity last week decreased to 46.1% of total applications from 46.5% the week prior, according to MBA data.
Whether the Fed cuts rates in September, it remains unclear how mortgage rates will react, according to Chen Zhao, head of economics research at Redfin. While the federal funds rate influences borrowing costs for Americans, mortgage rates closely track the 10-year Treasury yields, which are sensitive to changes in the economy.
Overall, experts say it is important for homeowners with higher-rate mortgages to start paying attention to interest rate movements, and preparing for opportunities to refinance.
“Getting the preparation done beforehand will allow you to move quickly,” said Keith Gumbinger, vice president of mortgage website HSH.
‘You probably need to move quickly’
Before you refinance, you want to make sure mortgage rates have “dropped sufficiently” for you to see real savings, Melissa Cohn, regional vice president of William Raveis Mortgage, recently told CNBC.
There are different rules of thumb used to determine when rates have declined enough. According to Redfin’s Zhao, homeowners should consider a refi if rates are at least 50 basis points lower than their current rate.
Rates can change fast, so it’s smart to know that target number and start preparing ahead of time, experts say.
“If you’re looking to refinance, especially in this type of interest rate climate, you need to be opportunistic, which means you probably need to move quickly,” said Gumbinger.
Here are five key steps to take:
1. Take a look at your credit reports
First, pull your credit reports from all three bureaus — Equifax, Experian and TransUnion — to understand how information on them is influencing your credit score. You can request them from the major credit bureaus for free via annualcreditreport.com.
Knowing this detail will help you get more accurate rate quotes from lenders, according to HSH. Unlike many other kinds of loans, with mortgages, lenders tend to look at scores from all three bureaus.
If you notice any errors that could be inadvertently hurting your score, the sooner you fix them, the better, experts say. Reach out to the creditor as well as the credit reporting bureau, and explain the situation, said Gumbinger.
However, it may take a bit of time to get the necessary parties involved and get the error fixed, he said.
2. Protect your credit score
You want to protect your credit score as much as possible. Generally, the higher your credit score, the better terms and interest rates you qualify for.
If you plan to refinance in the near future, avoid doing things that could hurt your score, such as applying for new credit cards or other lines of credit, or making sudden, big purchases that you can’t pay off quickly, and avoid making late payments.
3. Estimate your level of home equity
After checking your credit history, estimate how much equity you have in your home. If you have at least 20% equity in your home, you will get better loan terms from lenders, according to Bankrate.
4. Start gathering essential documents
If you believe you’ll benefit from a refi soon, HSH recommends gathering the following documents:
- Proof of homeowners insurance
- Proof of income and assets
- The latest copy of your existing mortgage statement
- A copy of your property’s deed to show legal ownership
- The latest property tax statement
- The names and addresses of your employers for the past two years
You can also start putting aside funds to cover upfront costs associated with a refi, including an appraisal and credit reports. An appraisal fee can cost roughly $300 to $500, while a credit check fee is typically less than $30, according to Bankrate.
5. Start contacting mortgage lenders
There’s an advantage to beginning to research different lenders and what they offer before you actually want to refinance because interest rates move pretty quickly, said Gumbinger.
Rather than starting from scratch when you’re ready to refi, gathering contact information and learning about different loans, rates and terms ahead of time can be helpful, experts say.
“You don’t have to actually contact the lenders, but you can do some advance research to speed things along,” said Gumbinger.
Once you know you’re “actually ready to pull the trigger,” then you can seriously shop around, said Cohn.
Start with your existing lender, as they have a record history with you and may be able to offer a streamlined process, Gumbinger said. Once you shop around, you’ll want to pick the lender that offers you the best terms, such as the lowest interest rate, experts say.
You could even start getting on their contact lists and ask them to reach out to you once it’s good for you to refinance, said Zhao.
If you do refinance and interest rates happen to decline further, you can always repeat the process.
Just make sure “there’s a big enough gap to make it worthwhile,” Gumbinger said.
