5 Factors That Affect Your Refinance Rate

With mortgage rates on the edge of record lows and inflation on an upward trend, you may be wondering if it’s time to refinance your mortgage. However, you shouldn’t let a low refinance rate and concerns of high inflation be the deciding factors.  The final decision to lock in a low refinance rate should take your personal financial condition into consideration. That said, with U.S. inflation maintaining its upward trend, it’s likely that mortgage rates will soon follow. 
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National averages of the lowest rates offered by more than 200 of the country’s top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700-760, and no mortgage points.

If you’re thinking of refinancing, it’s crucial to understand the various factors that affect the rate you receive. Understanding these factors is the best way to narrow your options. It allows you to select the best refinance loan that makes sense for your financial situation.

1. Home Equity

Your home equity plays a vital role in determining your refinance rate. During the pandemic, many homeowners have seen an increase in their equity due to the rise in consumer confidence. This rise was good news for many. It meant that the number of homes in negative equity dramatically decreased.  Your home equity is important because it determines which program you’ll likely qualify for. For example, those with negative or low equity will typically not be able to refinance with a conventional lender. However, they may be eligible for some government programs instead. The best way to determine your eligibility to refinance your mortgage is to speak with a lender. Additionally, it’s better to have at least 20% equity in your home. Oftentimes this translates to a better refinance rate and qualifying for a loan much easier. 

2. Debt-To-Income Ratio

Since the global pandemic, lenders have tightened their criteria for qualified borrowers. The tightening not only applied towards a homeowner’s credit score but also their debt-to-income ratio.  Many lenders will also consider several other factors when looking at your debt-to-income ratio. These include job history, income level and the amount of savings. While each lender will vary, if you have a higher income, stable job history and substantial savings, it’s possible to get away with a ratio of up to 43%.  However, most will want to keep your ratio under 36% of your gross monthly income, with the preferred amount being under 28%. 

3. Credit Score

As mentioned earlier, lenders have tightened their borrowing criteria for loans, one being a person’s credit score. Many borrowers have found that they may not qualify for their desired refinance rate even with what they would consider good credit.  With the tighter criteria, many lenders require a credit score of at least 760 to get the most desirable rates. However, the actual score will vary with each firm.   If your credit score is lower than 760, it doesn’t mean you can’t refinance your loan. As long as the other factors fall within a lender’s criteria, you may still qualify for a new loan. However, it will likely come at the cost of a high refinance rate or fees. 

4. Inflation and Refinance Rates

Because of the essential role inflation plays in the economy, it’s also a number that lenders follow closely. As inflation rises, it decreases the dollar’s purchasing power.  Lenders require maintaining rates at a specific level to mitigate the erosion in purchasing power and return a profit. With the continuing upward trend in U.S. inflation, the risk of the Fed raising interest rates in 2022 is still on the table.  Although the Fed doesn’t have direct control, their actions and decisions indirectly affect home loan rates. This is because mortgage rates closely follow 10-year Treasury bills. At the end of the day, if the group thought is that inflation will break its upward trend and not become a long-term issue, then there will likely be no spike in mortgage rates.  However, if inflation continues to rise and affects other aspects like consumer prices, a rise in mortgage rates is very likely.  Unlike your credit score and debt-to-income ratio, inflation is something that’s out of a homeowner’s hand. It’s not something that can be paid off for a better rate, but it is a factor to keep a close eye on. 

5. Refinancing Costs and Application Volume

Since before the pandemic, lenders have been receiving high demand for mortgage refinances. The influx of volume has forced many lenders to prioritize new purchase loans to meet deadlines.  Additionally, many lenders are reluctant to hire more staff because they don’t expect the volume to sustain for much longer. That translates to setting a limit on the number of applications they’re willing to process or tightening the borrower criteria.  Oftentimes, it can cost a lender much more to lock in a desirable refinance rate than a new purchase loan. That generally means a refinance may have a higher rate than other loans.  From a lender point-of-view, it makes sense to have a higher rate on a refinance if you consider the higher cost and influx of applications. There’s also the risk of borrowers switching lenders if interest rates fall. 

Getting a Low Refinance Rate

Even with a high volume of applications and a preference for new purchase loans over refinances, getting a desirable refinance rate is still possible.  Understanding the various factors that affect your refinance rate can put you at an advantage. If your financial circumstances allow for a refinance, it may make sense to take advantage of the low rates.  Get in contact with the specialists at Titan Mutual Lending Inc. to see if refinancing today makes sense. 
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