A mortgage refinance is when you replace your mortgage with a new loan that has better terms, such as a lower interest rate or monthly payment. Other reasons to refinance a mortgage could include shortening a loan term, eliminating a loan with private mortgage insurance or switching from an adjustable rate to a fixed rate.
How does refinancing work?
In a home refinance, your new loan will pay off the old loan, and allow you to start over with a new rate and better terms. Lenders take your application and do a thorough check of your finances and credit (again) before providing you with a loan estimate that outlines the terms and costs of your new mortgage.
Shopping around can save you money when refinancing your home. To get your lowest refinance rates, shop with at least three or more lenders, and make sure your credit and finances are in good shape to boost your chances of a refinance approval. Refinance lenders will also order a home appraisal to gauge the current value of your home and determine how much equity you have. The more equity you’ve built, the better your refi rates will be.
When should I refinance my mortgage?
A mortgage refinance makes sense when you're able to get a positive net benefit from doing so. When you should refinance depends on a number of things, including current mortgage refinance rates, how close you are to paying off your home loan, how long you plan on staying in your home and your financial goals.
Here are some of the most common reasons for refinancing a mortgage:
Lower your interest rate
If you refinance your home mortgage, you may be able to cut your rate by 0.50% or more. This can add up to tens of thousands of dollars in savings over the life of your loan.
Lower your payment
A mortgage refinance can help you lower your monthly payments, either by reducing your interest rate or extending your loan term. This helps make payments more manageable.
Adjust your loan term
Borrowers who refinance their mortgage can significantly reduce the time it takes to pay off their home loan. This allows you to become debt-free earlier. Plus, refinance rates for a 15-year fixed mortgage are typically lower than 30-year refinance rates.
Tap home equity
If you need money for home repairs or improvements, college costs or debt consolidation, a cash-out refinance allows you to withdraw your home equity, oftentimes with a lower interest rate than other products.
Convert a variable rate to a fixed rate
If you have an adjustable-rate mortgage (ARM) and are worried about interest rates rising, refinancing your home mortgage into a fixed rate can buy you some peace of mind as well as get you a great low rate for the long term.
Remove private mortgage insurance (PMI)
AnnualPMI can cost up to 1.5% of your loan balance, and can’t be canceled on most loans insured by the Federal Housing Administration (FHA) regardless of how much equity you have. Refinancing into another mortgage lets you reduce or even eliminate burdensome PMI costs, especially if you have extra cash on hand.
How to refinance your mortgage
In order to refinance a mortgage, you go through almost the same process as you did when you first took out your loan. Here are seven quick steps to refinance your mortgage:
1. Decide on your refinance goal
A mortgage refinance should help you improve your financial picture. In lending terms, this is called a tangible net benefit. Set a clear goal upfront — lowering your payment, paying your loan off faster, tapping equity, etc. — so you know exactly what you’re trying to achieve. This will also help lenders better prioritize what you need when quoting mortgage offers.
2. Check your credit score and finances
Pull your credit reports for free from AnnualCreditReport.com ahead of time and check your scores, too. If you spot errors on your credit reports, notify the credit agency in writing to correct them. Lenders will do a full vetting of your finances, including your income, employment history, debts, assets and credit scores.
3. Figure out how much equity you have
In general, the more equity you have, the better your mortgage rate will be. You build equity over time by paying down your principal loan amount and/or because home values in your area have increased. To find your equity amount, subtract your current mortgage balance (and any other loans against the home) from your home’s current value.
4. Shop around for refinance lenders
Apply for a refinance with three to five lenders within two weeks (and typically no more than 30 days) so the inquiries don’t negatively impact your credit. Mortgage rates fluctuate daily, so you want to apply for a refinance within a shorter time frame to get comparable offers. Look closely at the Loan Estimate from each lender to compare closing costs, lender fees and other key loan terms.
5. Choose a refinance lender
Once you’ve compared Loan Estimates, choose a lender who can help you best achieve your refinance goal. The Loan Estimate should detail how much cash you’ll need to close, as well as the terms of your new mortgage. This is also a good time to get a written rate lock confirmation to ensure your rate won’t change at closing.
6. Prepare for the property appraisal
Your lender will order a home appraisal to determine your home’s value. Make sure you tell the appraiser about any improvements you’ve done to the home. It’s also a good idea to clean your home and make it as presentable as possible.
7. Close on your refinance
Ensure all of the details on your Closing Disclosure are correct, and make sure your closing costs haven’t dramatically increased from the Loan Estimate. You’ll pay closing costs and sign paperwork for your new loan, and your old loan will be paid in full by your new lender.
How to get your best refinance rates
By comparing lenders and having them compete for your business, you can get your best mortgage refinance rates. The better your rate, the lower your payments will be and the more money you’ll save in interest. Refinance lenders will evaluate your credit and finances in the application process. Having a good credit score, solid repayment history, low debt-to-income ratio and 20% or more equity in your home are just a few ways to get your best mortgage refinance rates. Using a mortgage rate comparison site like LendingTree helps you compare several different lenders at once — just input the basic parameters of what you’re looking for and matching lenders will contact you.
LendingTree Study: Cities Where Mortgage Refinance Borrowers Saved the Most by Shopping Around – Spring 2020
As interest rates change, so do the savings you can reap from shopping around for a refinance lender. To help consumers understand how much they can save, LendingTree created a Mortgage Rate Competition Index. It measures the basis point spread between high and low annual percentage rates, or APRs, offered to users on the LendingTree marketplace through the first quarter of 2020.
On average, LendingTree found that refinancing could save homeowners an average of nearly $55,000 across the nation’s 50 largest cities. That could translate to about $45,000 in Milwaukee or nearly $70,000 in San Francisco.
Comparing refinance offers can yield big savings for borrowers in some of the nation’s most expensive cities. The three cities where refinance borrowers can save the most are San Francisco ($69,264), San Diego ($65,296) and Los Angeles ($64,180).
Louisville, Ky., Orlando, Fla. and Oklahoma City are the cities where refinance borrowers can see the largest spread in APRs when they shop around. The average Mortgage Rate Competition Index in these three areas is 1.26. This spread yields average lifetime interest savings of $57,745.
Even in cities where savings aren’t as robust as they are in San Francisco or San Diego, significant savings are still possible. For example, in Milwaukee where potential savings are the lowest, refinance borrowers can still save $45,044 over the life of their loan by shopping around.
Cutting back the total interest paid over the lifetime of a loan can translate into meaningful savings on a monthly and yearly basis. For example, refinance borrowers can save an average of about $153 a month, or $1,842 a year.
What the index means for you
Let’s say a borrower is offered two loans on the LendingTree platform — one with an APR of 4% and another with an APR of 3.5% — the spread would be 0.5%, or 50 basis points. The wider the index, the more a potential buyer can save by shopping around with multiple lenders. For this report, we used the index to analyze the difference in rates and potential savings for mortgage refinance borrowers in the 50 largest cities in the United States. By using LendingTree to shop around before refinancing, a borrower could potentially save an average of nearly $55,000 over the life of their loan.
Cities where refinance borrowers could save the most in lifetime interest payments
No. 1: San Francisco
Lifetime interest savings: $69,264
Median home loan amount: $370,000
Monthly payment savings: $194
Annual payment savings: $2,330
Mortgage Rate Competition Index: 0.97
No. 2: San Diego
Lifetime interest savings: $65,296
Median home loan amount: $340,000
Monthly payment savings: $183
Annual payment savings: $2,197
Mortgage Rate Competition Index: 0.99
No. 3: Los Angeles
Lifetime interest savings: $64,180
Median home loan amount: $325,000
Monthly payment savings: $180
Annual payment savings: $2,159
Mortgage Rate Competition Index: 1.02
Cities where refinance borrowers see the biggest spread in mortgage rates
No. 1: Louisville, Ky.
Mortgage Rate Competition Index: 1.32
Median home loan amount: $247,500
Monthly payment savings: $178
Annual payment savings: $2,132
Lifetime interest savings: $63,368
No. 2: Orlando, Fla.
Mortgage Rate Competition Index: 1.24
Median home loan amount: $225,000
Monthly payment savings: $152
Annual payment savings: $1,819
Lifetime interest savings: $54,074
No. 3: Oklahoma City
Mortgage Rate Competition Index: 1.22
Median home loan amount: $235,000
Monthly payment savings: $156
Annual payment savings: $1,877
Lifetime interest savings: $55,794
What is the Mortgage Rate Competition Index?
The LendingTree Mortgage Rate Competition Index is a proprietary measure of the dispersion in mortgage pricing. It measures the APR spread of the best offers available on LendingTree relative to the least competitive (i.e., the highest) rates on 30-year, fixed-rate mortgages. Our research shows that mortgage rate competition varies with the financial and operational measures of activity in the mortgage markets. More details on the index are available in a LendingTree white paper.
How is the index formulated?
A mortgage shopper enters their information on LendingTree.com. They input loan variables, including the proposed amount and down payment, and property variables, including property type and location. Using our proprietary algorithm, LendingTree matches borrowers with lenders based on the criteria they provide. Interested lenders return a rate and fee offer. For our index, we combine the rate and fees into an APR and calculate the spread as follows:
The spread is the difference between the highest and lowest offers. In this example, 4.62-4.21 = 0.41. We repeat this calculation across 30-year, fixed-rate loans and then find the median of the individual spread, which is our index value. This is done separately for the population of purchase and refinance loan requests. For the purposes of this study, we used data on the combined statistical area (CSA) or metropolitan statistical area (MSA) levels to approximate data on a city level.
LendingTree research analyst Jacob Channel contributed to this report.
Benefits of refinancing a mortgage
No matter what your mortgage refinance goals are, the key is ensuring you get a distinct financial benefit from the process. In other words, refinancing should help you save money in some way.
Here are some of the potential benefits of refinancing a mortgage:
Get a lower refi rate. A lower refinance rate means you could save thousands in interest payments over your loan’s lifetime. It could also lead to lower monthly payments.
Lower your monthly payments. By snagging a lower refinance rate or extending your loan term, you could reap monthly savings, freeing up more of your budget for other goals. However, keep in mind that resetting your loan term to a new 30-year loan will lead to more total interest paid.
More stable mortgage payments. When ARMs reset, the interest rate can go up or down, and this can take borrowers by surprise in a rising rate environment when interest rates increase, driving up monthly payments. With a fixed-rate loan at current refinance interest rates, though, you’ll have stable payments for the life of the loan — and more peace of mind.
Ditch PMI costs. PMI can add up over the long term. If you have an FHA loan with the maximum financing option, mortgage insurance premiums cannot be canceled. The only way to remove it is to refinance into a conventional loan once you’ve gained 20% equity.
Borrow cash. Home equity can be a powerful tool when used wisely. Cash-out refinance rates are often lower than those for other financial products. If you put the money toward improving your home, you’ll increase its value. If you use a cash-out refi to consolidate high-interest debt, you could reap substantial interest savings and pay off debt more quickly.
Remove a person’s name from your mortgage. If you get a divorce or otherwise need to remove a co-borrower from the mortgage, refinancing is the only way to do it. This frees them of the financial liability to the mortgage, but it does not remove their name from the title of the home, which is a separate process.
Combine two mortgages into one loan. If you have a second mortgage, like a home equity loan or HELOC, mortgage refinancing may save on interest and hassle by combining the second loan with your existing loan balance into one new mortgage.
Can I refinance my mortgage with no closing costs?
You can refinance a mortgage without paying closing costs. A no-closing cost refinance doesn’t require any upfront closing fees, but that doesn’t mean you won’t pay for it. Your lender will either roll the closing costs into your mortgage by increasing your loan amount or offer you a higher interest rate. As a result, your monthly payments are higher for the life of the loan.
What credit score do I need to refinance a mortgage?
The credit score you’ll need for a mortgage refinance will vary by loan program. For a conventional rate-and-term refinance, you’ll need at least a FICO score of 620 or higher while a minimum of 580 is required for an FHA loan.
Can I refinance a mortgage with bad credit?
You can refinance a mortgage with bad credit, but your options will be more limited for a conventional rate-and-term refinance. Some government-insured loan programs, like FHA loans and VA loans, offer refinance options to eligible borrowers with lackluster credit. You also can work with an alternative or non-prime lender if you have bad credit, or simply wait to refinance your home until you improve your credit score.
Is now a good time to refinance?
The timing of a mortgage refinance depends on your specific goals. If you’re trying to lower your interest rate and/or monthly payment, refinance rates are still near historic lows so many homeowners can still benefit from a refinance. However, when interest rates rise, a mortgage refinance may not make financial sense and actually increase your long-term costs. Use a mortgage refinance calculator to help you decide if now is a good time to refinance.
How long does it take to refinance a mortgage?
In October, it took an average of 42 days to close a mortgage refinance, according to the latest Ellie Mae Origination Insight Report. 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.
How long should I stay in my home after refinancing?
You want to stay in your home long enough to recoup your refinance closing costs, which is typically a few years. This is known as reaching the break-even point, or when the monthly savings from a mortgage refinance offset refi costs.
To calculate the break-even point, divide the monthly refinance savings by the total refinance costs. The result will tell you how many months you need to stay in your home to recoup those costs. For example, if it costs $2,000 to refinance a mortgage and a refi saves you $50 each month, your break-even point is 40 months ($2,000/$50=40). Moving before that point means you’ll lose money on a refi. Use our mortgage refinance calculator to determine how long you should stay in your house before you break even on refi costs.
What are the risks of a mortgage refinance?
Refinancing comes with many benefits, but there are risks, too. Here are the most notable risks that come with mortgage refinancing:
– Losing your home to foreclosure if you default on the new loan
– Not breaking even on your closing costs
– Restarting the clock on your loan term and paying more total interest
– Misusing cash-out refinance funds in ways that add to your debt load without improving your finances.
What are the different types of mortgage refinance loans?
The most common types of refinances are offered by conventional lenders, as well as those approved by the FHA and the U.S. Department of Veterans Affairs. Here are details about each option:
Conventional refinance. Ideal for borrowers who have good credit, stable incomes and low DTI ratios.
FHA refinance. Homeowners with scores below 620 may benefit from the easier qualifying guidelines offered by FHA-approved lenders. If you already have an FHA mortgage, you may be eligible for an FHA streamline refinance, which doesn’t require income verification or a home appraisal.
VA refinance. VA loans include less stringent mortgage refinance requirements for eligible active-duty and veteran military borrowers, and they don’t require PMI. Homeowners with a current VA loan may be eligible for the interest rate reduction refinance loan (IRRRL) program to lower their payment with minimal documentation and no appraisal.
Is it better to refinance with the same lender?
You can certainly refinance with the same lender, but shop around first to ensure you’re getting your best mortgage refinance rates. Compare Loan Estimates from your current lender and at least two other companies to evaluate refi rates, as well as closing costs and lender fees. If you choose to work with your current lender, scrutinize the new loan agreement carefully to ensure you understand the loan terms.