The mortgage refinance market is swinging as lenders are dropping rates and homeowners are eager to get on the dance floor. Just as borrowers didn’t think the low mortgage rate party could get much better, United Wholesale Mortgage announced 2.5 percent interest rates for 30-year fixed purchase mortgages and refinances.
“Purchasing has been delayed since the pandemic, so we thought the best way to help people right now is to give them more purchasing power,” says Mat Ishbia, CEO of United Wholesale Mortgage.
United is the largest wholesale lender in the country, working directly with mortgage brokers who, in turn, pass those rates to customers. In other words, consumers can’t get a home loan directly from them. Since the announcement, Ishbia says calls to the office have rocketed from 20 per day to up to 10,000.
The demand for mortgage refinancing is so hot that refinances will hit $1.5 trillion in 2020, 51 percent higher than last year, according to a forecast from the Mortgage Bankers Association. These are staggering numbers considering the GDP dwindled by 4.8 percent in the first quarter of 2020 and may decline by double digits for the year.
For rate watchers, locking a rate in the 2s is like underdog Buster Douglas beating Mike Tyson in 1990. It wasn’t impossible — but could it actually happen? According to history and Ishbia, the answer is yes.
“It’s happening — we had almost $1 billion worth of loans in the 2s, this is not a bait and switch,” Ishbia says. “In three days, we’ve had about 10,000 borrowers locked in the 2s.”
Consumers should be aware that lenders will add fees to that low 2.5 percent interest rate, so the APR will be higher. Experts advise that you get all the costs in writing so you know exactly how expensive the loan will be. In Bankrate’s weekly rate survey, the average lender nationwide is charging 3.56 percent, and that includes 30 basis points of discount and origination fees.
In addition to fees, not all borrowers will qualify for these ultra-low rates. Lenders will offer the lowest interest rates to borrowers with high credit scores (in the mid 700s and above) and low loan-to-value ratios, which you can calculate here.
Two important things can borrowers do to snag a sub-3 percent rate
- Shop around (Make sure the fees don’t outweigh the savings)
- Raise your credit score/Lower your DTI
Armed with ultra-low interest rates, independent lenders are poised to compete for the hoards of refinancers ready to swap their existing mortgage for a cheaper one.
This gives borrowers a sweet advantage. If you have a solid credit score, a low debt-to-income ratio and at least 20 percent equity in your home (you can have less, but you might face higher rates), then you’re in a good position to get the best mortgage rate out there.
That means you shouldn’t settle for the first lender that quotes you a rate. Unless that rate is in the 2s with very low closing costs, it pays to comparison shop.
Be sure to look at closing costs, as well as interest rates, when you’re weighing lenders as some charge steeper fees than others. Closing costs usually include insurance, escrow and title fees, credit reporting costs, appraisal fees, points (these are optional and can be bought to lower the interest rate) and lender fees. The all-in cost of your loan, which comprises both interest rate and closing costs, is called the APR. You can learn more about the difference between APR and interest rate here.
“Closing costs vary by lender. Some lenders who have extremely low rates may have higher than average closing costs, so you’ll want to factor that into your decision-making process,” says Kevin Parker, vice president of Field Mortgage at Navy Federal Credit Union. “Typically, we see closing costs in the neighborhood of 2 to 4 percent [of the total loan amount] , so that can be a good starting point when comparing lenders.”
Raise your credit score
Before you spend a lot of time applying for a refinance, make sure your credit score is in fighting shape. Only the top scores will get the best rates. Experts advise borrowers to shoot for a FICO score in the mid- to high-700s. Credit scores above 800 are considered excellent.
Credit requirements vary by lenders and can even change from week to week. Lenders are deciding their criteria for borrowers based on current needs and risk tolerance, so it’s important to get the latest information.
“Ask questions before you apply. Find out what the required credit score is to get their lowest rate. If you don’t meet the credit profile of a 2.5 percent interest rate, then the question is ‘what do i qualify for?’ Maybe you don’t qualify for the lowest rate, but you can get the next-best rate,” says Shelley Metz-Galloway, managing director, risk & compliance at Protiviti.
If your credit score needs some work, the good news is that rates are expected to stay low, so you likely have some time to improve your score, depending on what’s holding it down. High credit card debt can be fixed faster than a bankruptcy, for example.
With debt, you can pay it down (if your finances permit), resulting in a higher score in as soon as a few weeks, or a couple of months; this hinges on how quickly creditors report your payment history to the three credit bureaus, but in the case of bankruptcy only time can heal that negative event.
Some lenders will work with existing customers who might not tick all the boxes on paper. So if you have a longstanding relationship with your bank, be sure to talk to them about your options.
“It all depends on the lender. Most will want to look at your credit score, debt-to-income ratio, equity in the property, and any previous borrowing history you might have with them. At Navy Federal, a member who’s got a great history with us can still get an excellent rate, even if their credit score isn’t perfect. The key is asking these questions to prospective lenders right off the bat,” Parker says.