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Getting the Best Mortgage Refinancing Rates

So, you've heard that refinancing can save you a lot of money, and now you're wondering how to get started. Or more specifically, you're wondering how to get the best mortgage refinancing rates in order to make the whole process worthwhile. If this describes you, then you've come to the right place. This article explains how to get the best interest rates when refinancing your home loan.

Why Interest is So Important

Most people understand the basics of how interest rates work, as they pertain to mortgage loans. A lower rate means you save money, right? Right. But when it comes to refinancing, there's more to it than that. When you refinance your home, the interest rate is one of two factors that will determine whether or not refinancing makes sense (closing costs are the other important factor).

The interest rate you're able to obtain when refinancing your mortgage makes all the difference in the world. In fact, based on the rate the lender offers, you might even find that a refinance is a bad idea. Sure, there are several variables that go into this decision-making process, but the interest on your mortgage refinancing loan is one of the key factors. This is why homeowners should seek the best rate they can find, based on their level of qualification.

Why is this so important? Several reasons. First of all, you need to know the interest rate in order to determine the "break-even point" (also referred to as the BEP) for your refinance loan.

The whole point of a refi is to save more money in the long run than you pay at the time of closing -- and getting the best mortgage refinancing rate possible is the key to all of this. Here's the bottom line: If you pay too much interest, or too many closing costs, the refinance process won't work to your advantage. So it's important to get the best rate the lender has to offer.

How to Get the Best Rates

The first thing you need to understand (and something I've alluded to above) is that not all borrowers will qualify for the same interest rate when refinancing their homes. That's why you will always see a disclaimer when a lender advertises its rates online or on paper -- the best rates are reserved for "well qualified customers." Here's what that means:

If you think back to the mortgage approval process when you first bought the home, you'll remember that the lender reviewed all aspects of your financial picture. They did this in order to (A) approve you for the loan and (B) determine the interest rate to offer. When you refinance your mortgage, you'll go through that same process again. And if you want to qualify for the best mortgage refinancing rates you must meet that lender's definition of "well qualified borrower."

Here are some of the criteria lenders will review:

• Your credit score
• The amount of equity you have in your home
• Your debt-to-income ratio (DTI)

There's more to the review process than this, but these are the big three factors that will influence the rate you get. So where do you need to fall on the scale? Well, this will vary from one lender to the next, so it's hard to make generalizations. With that being said, here's a snapshot of what most lenders would consider a well-qualified borrower:

• The borrower's credit score is 750 or higher.
• The borrower has more than 20% equity in the home.
• The borrower has a favorable debt-to-income ratio, less than 30%.

Again, I'd like to stress that every lender has its own qualification criteria. And this is why it's so important to shop around. One bank might not offer you their best refinancing rates, while another one does. This is especially true if you fall right on the "line" of what they consider a well-qualified customer. Some will offer you the lowest rates -- others will not.

How to Prepare for Refinancing

You have control over two out of the three qualification criteria listed above. You can reduce your debt to improve your DTI ratio, and you can raise your credit score over time. By doing these two things in tandem, you can increase your chances of getting the best refinance rates. This website offers plenty of advice on how to do this.

But you'll have less control over the equity side of things. For many homeowners, having at least 20% equity in their homes is the biggest obstacle to refinancing. This is especially true in 2009 and beyond, because property values have dropped all across the United States. Equity (or ownership) can be defined as the current value of your home minus your current loan balance.

Of course, if you're upside down in your mortgage like millions of Americans right now, you won't be able to refinance -- you'll actually have negative equity in this scenario. So before you move forward in the process, you should find out where you stand in terms of equity and property value.

Here's an article that explains the rest of the home refinance process you'll encounter. I hope you've found this tutorial helpful, and I wish you well in your pursuit of the best mortgage refinancing rates available.