Refinance - The Mortgage Expert

Several factors affect refinance mortgage rates. For instance, rate/term refinance rates are much lower than cash out refinance transactions. Also, shorter term mortgages such as 15 year fixed have almost .5% lower mortgage rates than a 30 year fixed mortgage. Also, borrowers that have a lot of equity in their home get a much lower mortgage rate than borrowers with little or low equity.

Mortgage pre-approval is essentially applying for a loan before purchasing a home. You begin by completing an application, disclosing details about your income, employment, and financial situation. Next, you’ll need to provide supporting documents such as pay stubs and tax returns. The lender assesses your credit score to determine your creditworthiness. After a thorough review, they decide on the maximum amount they are willing to lend you. If you’re approved, you receive a letter specifying the approved loan amount, and this letter is typically valid for a specific duration. Armed with this pre-approval letter, you can confidently search for homes within your budget. It’s important to note that pre-approval isn’t a guarantee of a mortgage but is a valuable step in the homebuying process.

One of the most important factors that determines your mortgage rate is your credit score. The lower the credit score, the higher the interest rate. Usually any borrower with a credit score of 740 and higher receives the same rate as someone with a credit score of 800. On the other hand, below 740 credit scores, the lenders typically break up the rate adjustment every 20-point increment. For instance, a borrower with a credit score of 700 will have a higher rate than a borrower with a 720 credit score. This does not mean that a borrower with a 680 credit score cannot get the same rate as a borrower with an 800 score.

Risk plays a big factor on mortgage rates. The more equity you have in your property the less risk for the lender when it comes to conventional mortgage loans. For instance, if you are trying to get a loan for cash-out refinance, your interest rate is much better when the loan-to-value is under 60% of the property value.

Conventional mortgage loans offer the lowest mortgage rates when the homebuyer is putting 40% down payment based on the purchase price. Other loan programs like FHA loans do not offer a lower rate based on the amount of down payment or property value. On VA loans where the borrower is exempt from the VA funding fee due to disability, the mortgage rate works out to be even lower than the best conventional mortgage rate regardless of the amount of down-payment or home value.

Getting pre-approved for a mortgage is based on various factors such as your income, existing debts, and the specific guidelines set by the lender. Lenders typically evaluate your ability to manage a mortgage by looking at your total monthly debts, including the expected mortgage payment. They prefer this debt-to-income ratio to be 43% or less of your gross monthly income (before taxes). However, it’s worth noting that some lenders may allow a higher debt-to-income ratio, such as up to 49.9% for conventional loans or up to 54.9% for FHA or VA loans. 

For example, if your monthly income is $4,000, the lender would prefer your total debts, including the future mortgage payment, to be $1,720 or less. Keep in mind that different lenders may have varying criteria, so it’s essential to explore options from multiple lenders to understand their specific requirements. Additionally, making a larger down payment can sometimes help improve your debt-to-income ratio if it’s slightly higher than the preferred range. To get a precise understanding of what’s needed based on your unique financial situation, it’s advisable to consult with a mortgage professional.