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Given this year’s unbelievably low mortgage rates, refinancing remains at the top of many homeowners’ to-do lists — and it has taken on more urgency as a new refi fee has some lenders pushing rates higher.
A 30-year fixed-rate mortgage might be a borrower’s automatic first choice for a refinance loan. But if you’ve been in your house a few years, refinancing to a 15-year mortgage can keep you from dragging out the debt and piling up massive interest costs.
The monthly payments with a 15-year home loan can be steeper, but the interest rates are lower — currently averaging a record low 2.32%, about one-half of 1 percentage point below the typical 30-year mortgage rate, according to mortgage company Freddie Mac. Some lenders have even been offering 15-year loans at under 2%.
Here are four tips on how to get the very best deal when refinancing into a 15-year mortgage.
1. Run the numbers on 30- and 15-year loans
Most mortgage lenders offer both 30- and 15-year terms. Compare the current average rates between the two loan products, then zero in on a couple of lenders and see how their 30- and 15-year rates differ.
If 15-year mortgage rates don’t seem substantially lower, it may not seem worthwhile to accept the stiffer monthly payment that comes with the shorter-term loan.
Still, the long-haul savings can be considerable.
Freddie Mac says rates are now averaging 2.81% for a 30-year fixed-rate mortgage, versus 2.32% for the 15-year option. Let’s say you’re trying to decide whether to refinance a $200,000 mortgage balance for either 15 or 30 years, at today’s average rates.
Your monthly payment would be $1,317 with a 15-year mortgage at 2.32%, yet only $823 with a 30-year loan at 2.81%.
But you’d pay total interest of about $37,000 with the shorter-term loan, versus roughly $96,400 — $59,400 more — over the course of the 30-year mortgage.
2. Be the best borrower you can be
Before you start applying for mortgages, check your credit score. Today, it’s very easy to take a peek at your score for free.
A lender wants to feel confident you’ll pay back the loan and not default — particularly at a time when so many people are in a financial squeeze from the coronavirus pandemic. A very good (740 to 799) or excellent (800 or higher) credit score will help provide that assurance.
If your score could stand improvement, request copies of your credit reports from the three major credit reporting bureaus — Equifax, TransUnion and Experian — and make sure they’re accurate.
Bad information, such as debts that aren’t yours, or debts that are too old and should have fallen off the reports, can weigh down your credit score.
Sharpen your score by paying down debt (especially credit card balances), getting bill payments in on time, and not opening new credit accounts while you’re shopping for a home loan.
3. Shop around (quickly) for a great rate
Once you’ve settled on a 15-year mortgage for your refi and have determined your credit score looks solid, check rates from multiple lenders in your area. Review them side by side to identify the best deal available to you.
As you research rates online, you may want to look at the websites of major banks operating where you live. They often have similar pricing on their mortgages, but you might find one offering a cheaper rate or more favorable terms.
Small local banks and credit unions often have affordable rates, but the approval processes can be slower.
You’ll want to move quickly, because experts say some lenders are raising refi mortgage rates as lenders start to factor in a new 0.5% fee on refinance loans that officially takes effect on Nov. 3.
Freddie Mac and Fannie Mae — two government-sponsored mortgage giants that buy or guarantee most U.S. mortgages — say they’re introducing the fee because they need to offset billions in losses from defaults and other issues related to the COVID-19 crisis.
4. Pay as much as you can upfront
If you don’t have much equity in your home, making a larger down payment on your refinance loan can help you land an extremely low 15-year mortgage rate for your refi.
Like a decent credit score, a bigger down payment is a way of demonstrating to the lender that you’re a good risk and deserve a low rate.
If you’re heavily invested in your house, it’s less likely you’ll walk away from your mortgage.
Plus, making a down payment large enough to give you at least 20% equity in your home will keep troublesome private mortgage insurance (PMI) premiums from being tacked onto your house payments.