Many people go into the refinancing process expecting it will be a simple and easy way to reach their financial goals. And part of that is true: whether the goal is to reduce a monthly mortgage payment, consolidate debt, take cash out, or shorten an exiting loan term, refinancing can be a great financial tool. But because mortgage rates change daily and different lenders have different fee structures and profit margins, the process will require some significant time and commitment on your part. So in this article, we’ll focus on the work you’ll need to put into refinance rate shopping and rate-lock strategy.
Of course it’s only natural to want to save money – that’s likely the reason you’re considering refinancing to begin with. But because no one can predict where the mortgage market will be tomorrow, just like no one can predict where the stock market will be tomorrow, you’ll want to think about the rate that makes financial sense for you before you even start shopping.
Instead of trying to guess where rates will go, change the way you approach rate shopping. Knowing the highest interest you can accept to ensure you achieve your financial goals ahead of time will give you concrete boundaries and a plan, which will make the process of finding a lender much smoother.
So once you know what you’re looking for, really put yourself out there. It’s important to shop around and talk to multiple lenders to get the best deal. When you’ve done your research and found a lender who can provide the best deal for your individual financial situation, it’s time to close. Be sure to check out our post on the top questions to ask a loan officer for more information about the process of choosing a lender.
Mortgage rates change every day, sometimes multiple times a day. So once you’ve found an offer you’re serious about, it’s important to act quickly. But don’t get overwhelmed and to feel pressured to make a rash decision. You want to act quickly, but do so deliberately, with precision and confidence.
A mortgage rate lock or “lock-in” is when a lender holds your interest rate (and any other loan terms, like points) for a specific period of time. This is important precisely because interest rates are ever changing. Once your rate is locked, it can’t fluctuate with the market for that specified period of time. On the other hand, if you don’t lock your rate, there is nothing guaranteeing you will actually receive that rate. A lender can only work with the information they have at any given time.
If you think rates might go down in the future, but don’t want to risk losing the rate you were quoted, ask your lender whether they offer a “float-down policy.” If available, this can help take some of the pressure off and reduce risk. It works like this: once your rate is locked, if rates go down by more than 1/8th of a percent in the next 30 days, you’ll get the reduced rate instead of the rate you were originally quoted. The lender is allowed to “float down” your rate once during the lock period. And if rates go up, you’re still locked into your original rate.
The bottom line is to make sure you think about what you want out of your refinance before you start shopping for rates and lenders. Nail down your goals and calculate what loan terms you’ll need to get you there.