Mortgage Refinance: Refinancing gives you the opportunity to lower your rate or shorten the lifespan of your mortgage, allowing you to save on interest and repay the loan faster. Regardless of why you want to refinance, it’s important to shop around for lenders that offer the best terms and customer support. While mortgage interest rates are no longer near record lows, using one of the best mortgage refinance lenders may help you qualify for today’s best rates and avoid unnecessary lender fees.
Mortgage rates continued to moderate this week, according to the Mortgage Bankers Association. The 30-year fixed rate has fallen by over half-a-point in the past six weeks, leading to a modest increase in mortgage purchase applications. Refinancing activity remains stagnant as the vast majority of homeowners have rates lower than what’s currently available.
Mortgage interest rates were widely expected to fall throughout 2023 but are now expected to stay higher for longer into 2024. Here are the current mortgage rates, as of Nov. 29:
- 30-year fixed: 7.37% with 0.64 points (previous week: 7.41% with 0.62 points).
- 15-year fixed: 6.88% with 0.52 points (previous week: 6.89% with 0.76 points).
- 5/1 ARM: 6.59% with 0.76 points (previous week: 6.76% with 0.82 points).
- 30-year jumbo loans: 7.54% with 0.62 points (previous week: 7.51% with 0.62 points).
- 30-year FHA loans: 7.18% with 0.81 points (previous week: 7.19% with 0.79 points).
A mortgage refinance replaces your original mortgage with a new one, ideally with a lower interest rate. You’ll get a new interest rate and other loan terms, and you can make other changes to the loan, such as trading an adjustable-rate mortgage for a fixed-rate mortgage.
Mortgage refinancing makes sense when you can use it to save on interest, access home equity or both. Consider some reasons people refinance a mortgage:
- Pay off your loan faster. If you shorten your loan term, such as switching from a 30- to a 15-year mortgage, you will build equity and pay off your loan faster.
- Save on interest. Even if you don’t shorten your loan term, a lower interest rate could save you money over the life of the loan.
- Reduce your monthly payment by extending your loan term. Usually, a mortgage with a longer term will have a lower monthly payment than a mortgage with a shorter term. But the longer you take to pay off your loan, the more interest you will pay overall.
- Convert equity into cash. If you have enough equity, you can take out some in cash and replace your mortgage with a new one that may have new terms.
- Secure a predictable payment. Switching from an adjustable-rate mortgage to a fixed-rate loan locks in your interest rate, preferably at a lower rate. Alternatively, you could switch to an ARM for savings in the first few years of a mortgage if you know you won’t live in your home for long.
Reasons to think twice before refinancing:
- You’ll have to pay closing costs. Your potential interest rate savings may be offset by closing costs when you refinance your mortgage.
- You may pay more over time. If you refinance into a new mortgage of the same term, say a 30-year loan, you are essentially restarting the clock on your debt.
- You’re taking on more debt. With a cash-out mortgage refinance, you are adding to your total debt balance to tap into your home’s equity.
- You may be charged a prepayment penalty. Some mortgage lenders charge prepayment penalties to borrowers who repay their loan before the term ends.
- Your payment could increase. If you refinance from a 30- to a 15-year loan, you will likely see your monthly payment jump.
Here are some common types of mortgage refinance loans:
- Rate-and-term refinance. The most common type of mortgage refinancing allows you to take the balance of your original mortgage and borrow at a different rate, ideally a lower one, and terms.
- Cash-out refinance. This option lets you take advantage of the equity in your home, replacing your mortgage with a new, larger loan and giving you cash at closing.
- Cash-in refinance. Borrowers make a lump-sum payment at closing to build up home equity and qualify to refinance for better mortgage rates and terms.
- Streamline refinance. Qualified homeowners with a mortgage through the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture may be eligible for more affordable terms if they refinance through these government programs.
- No-closing-cost refinance. Your lender won’t charge you closing costs upfront but will roll them into your principal balance or raise your mortgage rate to cover the fees.
Credit score. Generally, home loan refinance lenders require a minimum credit score of 620 for conventional loans. But you could qualify for refinancing with special programs, such as government-backed loans, if you have a lower credit score.
Debt-to-income ratio. You’ll also need sufficient income to qualify for your refinance. If your income has stayed the same or increased while your home loan balance decreased, you should have no problem with approval. Lenders generally won’t approve a loan with a monthly mortgage payment that’s more than 28% of your total gross monthly income, but there may be exceptions.
Loan-to-value ratio. LTV measures how much you owe on your home loan compared with your home’s market value. Typically, mortgage refinancing companies look for at least 20% home equity and an LTV ratio of up to 80%.
Also Read This: Pros and Cons of Different Mortgage Types
Expect to pay closing costs on a refinance similar to your original mortgage, generally about 2% to 5% of the loan amount. Charges may include lender fees, such as the origination fee, and third-party fees for inspection and appraisal.
On average, homeowners pay around $5,000 to refinance a mortgage, according to Freddie Mac. Before you refinance, use a mortgage refinance calculator to make sure your interest savings can offset your closing costs.
- You could save money now and over time. One of the primary goals of refinancing is to lock in a lower mortgage rate. By doing so, you will typically be able to reduce your monthly mortgage payments and save money on interest charges over the life of the loan.
- You may pay off your mortgage faster. You may choose to shorten your repayment term, such as refinancing a 30-year mortgage into a 15-year mortgage. This helps you get out of debt faster and save a substantial amount of money over time.
- You can lock in a fixed interest rate. Refinancing from an adjustable-rate mortgage to a fixed-rate mortgage eliminates the risk that your interest rate – and monthly payments – will change at the end of your fixed period.
- You can access your home’s equity. A cash-out refinance allows you to tap into your home’s equity, which you can use to meet other financial goals, such as renovating your house or paying off higher-interest debt.
- You may be eligible to eliminate PMI. Once you’ve hit a loan-to-value ratio of 80% or less, you may consider refinancing to get rid of private mortgage insurance.
Select the best lender to refinance your mortgage by evaluating product options, interest rates and customer service ratings.
Product options: Look for a company that offers the type of loan you want, whether that’s a 15- or 30-year fixed-rate mortgage; an FHA, VA or USDA loan; an adjustable-rate mortgage; or a jumbo loan.
Mortgage refinance rates: Once you find the right product, you can start shopping for the right price. Prequalify with a few lenders to find out whether you meet the minimum credit criteria and compare mortgage rates. Compare annual percentage rates, which reflect interest and fees, for the true cost of borrowing.
Customer service: Read reviews, ratings and complaints to check that a company can offer good customer service. Check Better Business Bureau ratings and search the Consumer Financial Protection Bureau’s Consumer Complaint Database for common grievances about lenders.
When you’re ready to refinance your mortgage, start by making sure you have a clear goal, whether it is reducing your monthly payment or pulling out equity for home repairs. Next, check your credit score to see whether it is in the ballpark to qualify for the type of loan you want. The final steps are comparison shopping by getting preapproved, gathering documents and applying, preparing for appraisal, and getting your cash for closing if needed.
- Mortgage recasting. A mortgage recast is when you put a large lump-sum payment toward your principal balance, which allows your lender to update your monthly payment for a fee.
- Loan modification. You may be able to extend your repayment term, reduce your interest rate or switch from an ARM to a fixed-rate loan through your current lender without going through the refinancing process.
- Home equity loan or line of credit. If you’re looking to tap into your home’s equity, you should also consider alternatives such as a HELOC or home equity loan.
Best Mortgage Refinance Lenders 2023
- Flagstar Bank – Best For First Responders, Active Military & Veteran Discounts
- PNC Bank – Best For Medical Professionals
- Chase – Best For Relationship Discounts
- Ally – Best For Fast Preapproval
- Better.com – Best For Online Mortgages
- Guaranteed Rate – Best For Alternative Credit Data Eligibility
- PenFed Credit Union – Best For Saving Money On Fees
- Bank Of America – Best For Discounts For Existing Customers
- Navy Federal Credit Union – Best For A Rate-Match Guarantee Program
- New American Funding – Best For Low Minimum Credit Scores
- Northpointe Bank – Best For No Down Payment
- Rocket Mortgage – Best For Flexible Mortgage Terms
- SoFi – Best For Applying Online
- Truist – Best For Financial Coaching Access
- LowRates.com – Best For 24-Hour Service