If you’d like a little more guidance as you choose a lender, check out our picks for the best mortgage refinance companies.
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A surefire way to find the best refinance rate is to shop around, but what does that really mean? The truth is that many factors beyond interest rates themselves matter when choosing a refinancing loan. Here are several things you should do as you go through the process of assessing refi rates and terms:
Mortgage refinance rates tend to move up and down in tandem with purchase mortgage rates, while remaining slightly more expensive — about 21 basis points higher on average so far in 2023. However, refinance rates differ from lender to lender, which is why it’s important to shop around and find a rate that’s competitive enough to replace your current mortgage rate.
Conventional cash-out refinances and certain high-LTV refinance loans will also incur extra fees at closing.
Conventional Refinance Loan Rate Changes in 2023Although the table above lists the minimum requirements, there are additional thresholds within the credit, DTI and LTV categories that determine whether you’ll be hit with extra fees. As of May 1, 2023, conventional loan borrowers with the following characteristics may face extra charges or rate increases:
Other fees, not related to your credit or loan amount, may also apply if you:
You should refinance when you’re sure to see a long-term financial benefit. You might refinance to get rid of private or FHA mortgage insurance, shorten your loan term, or for many other reasons, but you should only do so if you understand when you’ll break even on the refinance and how the changes in your payment amount will affect your monthly budget.
With the interest rate fluctuations we’ve seen recently, you may be wondering, “Should I refinance my mortgage?” A useful rule of thumb is that if a refinance can lower your interest rate by 1% or more, it likely makes good financial sense. However, the best way to determine for sure whether a refinance is in your best interest is to calculate your break-even point. To do this, just divide your total closing costs by your estimated monthly savings. The result is the number of months it will take you to benefit from the refinance savings.For example, if a refinance saves you $150 on your monthly payment but costs you $5,000 in fees, the break-even point would be about 33 months, or just under three years ($5,000/$150 = 33.33). As long as you plan to stay in your home for at least three years, the refinance saves you money.
The Consumer Financial Protection Bureau (CFPB) recommends that you only refinance if you can break even within two years. However, as long as you’re planning to live in your home beyond the break-even point, a refinance won’t be detrimental to your finances. The longer you retain the home after refinancing, the more savings you’ll see.
With today’s interest rates, it may not be the best time to refinance if you’re looking for a lower rate. However, there are other financially sound reasons to refinance now, including:
Know how soon you can refinance after closingConventional loan guidelines allow you to refinance at any time after you close, as long as you can prove there’s some financial benefit and aren’t taking cash out. Some government-backed refinance programs require proof you’ve made payments on your current mortgage for at least seven months. If you’re taking cash out, the seasoning period may be up to a year if you want to use your home’s current market value.
Because refinance loans require a credit check, the inquiry may drop your credit score by up to five points. When you’re mortgage shopping, try to have your credit run within a 14-day period to avoid a bigger drop from multiple inquiries.
You typically need at least 3% equity to refinance your mortgage, unless you’re eligible for a streamline refinance program through the FHA, VA or USDA. There are also programs available for homeowners to refinance an underwater home, meaning their outstanding mortgage balance is higher than their home’s value.
The most notable risks that come with mortgage refinancing include:
It takes on average 51 days to refinance a home, according to data from ICE Mortgage Technology. Your lender might take more or less time to close a refinance, depending on how much business they have and whether they use a digital mortgage application process.