How to Get a Low Rate When Refinancing

In simplest terms, refinancing is the process of taking an old home loan and replacing it with a new home loan that pays off the old loan. Under refinancing, the terms of the line might be changed -- such as from an adjustable rate mortgage to a fixed-rate mortgage -- or the terms might stay the same but with a different interest rate. When refinancing, it's important to try to land the lowest rate possible.

Considerations

• When refinancing, one of the most important considerations in getting a low rate is having a good credit rating. Low scores can indicate a higher likelihood of loan default, which is why the lower the credit score, the higher the rate charged.

Benefits

• Checking out multiple lenders is a good way to get a low rate when refinancing. Rather than relying upon just one lender, the borrower will have a wider range of rates and offers to choose from. Another factor that should be considered is exactly what the annual percentage rate (APR) for each lender is. While an initial quote might seem to be a good value, there might be issues further down the road that make it less than desirable.

Time Frame

• Taking a shorter-term mortgage will usually yield a lower rate. For example, in 2010, a 30-year fixed-rate loan had an interest rate of 4.6 percent, while a 15-year fixed-rate had an interest rate of 3.8 percent. To determine whether that particular loan is practical, all factors need to be considered, including closing costs, refinancing fees and even the cost in terms of time and effort.

Size

• The size of the loan is another factor in the interest rate that a lender will examine. Buying down interest rates is another option for certain individuals. Basically, an individual takes a sum of money and puts it into the equity of the house. This serves to reduce the principal of the loan. Therefore, when the refinancing comes up, there will be a lower interest rate, since the loan will be for a smaller amount of money.

Warning

• When refinancing, it is important to take into account all the various variables that come into play. While having a low rate might seem to be a cost-cutting measure, once you run all the numbers and all examine all the conditions of the refinance, the savings after refinancing might be minimal. Low rates, while an important part of refinancing, are not the only thing that a potential borrower should examine. For example, if a refinancing costs $3,500 in closing costs and the savings at the end of refinancing are less than $100 a month, an individual might choose not to go through the refinancing process, which can be arduous.