Should I Refinance My Home Loan?

When mortgage rates plunge into record-low territory, many homeowners ask “Should I refinance my home loan?” On the surface, the answer might seem obvious, but there are some standard rules of thumb to follow if you’re considering a mortgage refinance.

Should I refinance my home loan?

Refinancing a home makes sense if you can replace your current mortgage with a new home loan that provides a financial benefit. Interest rates dropped to historic lows in 2020 before bouncing back up as lenders struggled to keep up with demand.

You should consider refinancing if:

You can reduce your monthly payment and recoup costs quickly

Saving on your monthly mortgage payment is most cost-effective if you can recover closing costs quickly. You can calculate this by dividing your total costs by your monthly savings, which is also called your break-even point (more on this later). Consider a no-closing-cost refinance to avoid draining your savings account to pay for refinance closing costs.

You’re eligible to take advantage of streamline refinance programs

If your income has become unpredictable and you currently have a government-backed loan, no-income qualifying options may be available.

• FHA streamline*: If you can prove on-time payments on your current FHA mortgage, you may be eligible for an FHA streamline refinance. You won’t need income documents and can skip the hassle of a home appraisal.
• VA IRRRL**: A VA interest rate reduction refinance loan (IRRRL) allows active-duty and veteran service members with a current VA loan to refinance with no income verification or appraisal.

*The Federal Housing Administration insures loans made by FHA-approved lenders.
**The U.S. Department of Veterans Affairs guarantees loans made by VA-approved lenders.

You’ve got enough equity to reduce private mortgage insurance

You may be able to lower or even eliminate private mortgage insurance (PMI) by refinancing your loan. If your down payment was less than 20% when you bought your home, you’re likely paying private mortgage insurance every month.

You want to switch your FHA loan to a conventional loan

You’re stuck paying FHA mortgage insurance premiums (MIPs) for the life of your loan if you made a 3.5% down payment with FHA financing when you bought your home. Refinancing from an FHA to a conventional loan could save you big bucks on your monthly mortgage insurance.

You’re ready to pay your loan off faster

The shorter term of a 15-year, fixed-rate mortgage may be a faster path to owning a mortgage-free home, as long as you have room in your budget for the higher payment.

You’re replacing an ARM with a fixed-rate mortgage

Check your adjustable-rate mortgage (ARM) terms before you go down this road. With benchmark indexes at the lowest levels in history, your rate might drop when your adjustment period kicks in. Take advantage of the lower payment by applying the savings to your principal or padding your emergency savings account.

You want to tap equity to pay off bills or boost your emergency savings

A cash-out refinance may help clear out credit card balances or stockpile savings by replacing your current loan with a larger loan. Most lenders will cap you at an 80% loan-to-value (LTV) ratio, which leaves you with equity you can pocket if you have to sell your home quickly.

You can also use our mortgage calculator to determine if refinancing makes sense for you right now.

How do I refinance my home loan?

If you’ve already figured out the benefit of refinancing, the next thing you need to figure out is how to qualify for a refinance. You’ll want to comparison shop with at least three to five different lenders and review the interest rates and closing costs they offer.

Once you’ve chosen the lender that fits your needs, you’ll need to:

Verify you have job stability

If your employment and income are steady, a refinance loan could free up room in your budget.

If you’ve already applied for a mortgage refinance, let your loan officer know if your job situation or pay rate changes before you close. Lenders typically reverify your income before closing, and any changes could cause delays or even result in a loan denial.

Confirm you’ve paid your mortgage on time

Late mortgage payments may knock you out of the running to refinance your home loan. If you’ve fallen behind, contact your mortgage servicer immediately and discuss your situation.

Get a credit report to show you’ve paid other debts on time

Recent late payments on credit cards and installment loans are red flags to lenders that your finances may be shaky. They also have a big impact on the mortgage interest rates you may receive. A low credit score may push your rate up to the point that a refinance doesn’t make sense.

Qualify based on your total debt

Try to pay revolving credit balances in full each month. If you need to carry a balance, aim to keep your credit utilization ratio below 30%. In addition, lenders often check your credit before closing. A big jump in balances could spell trouble for your refinance approval.

Get a home appraisal to verify your home’s value

If home prices in your area are on the rise, you’ll have a better chance of getting approved for a refinance to cancel your PMI, tap equity to pay off high-interest rate credit card balances or snag some extra cash to finance home improvements.

How much does it cost to refinance?

You’ll spend 2% to 6% for closing costs on a typical refinance, depending on your loan amount. The table below provides an itemized breakdown of common refinance closing costs.

• Mortgage application fee: Some lenders charge this to process your mortgage application. The fee varies and may be charged upfront or applied to the origination fee when your loan closes.
• Home appraisal fee: This is typically required for a professional home appraiser to estimate your home’s market value. In some cases, you may not need an appraisal.
• Home inspection fee: If the appraiser calls out problems with the condition of the home (like a leaky roof or broken water heater) they might ask for a licensed home inspector to check the problem out.
• Loan origination fee: Lenders charge this to cover the costs of originating, approving and closing your loan.
• Title search and lender’s title insurance: Mortgage lenders require this coverage to protect them from any ownership issues with a home’s title for the life of your loan. Because you’re taking out a new loan, a new policy must be issued when you refinance.
• Local recording fee: This is charged on a refinance loan to record information about the new mortgage in public records.
• Reconveyance fee: Your current lender may charge this to release their interest in your home once the loan balance is paid off.
• Credit report fee: This is charged when a credit report is pulled by mortgage lenders to review your credit history.
• Flood certification fee: This is routinely charged to verify if the property is in an area prone to flooding.

Mortgage tip about your closing cost break-even point

Calculating the break-even point on a refinance is a good way to determine if a refinance is worthwhile. For example, if you can save $100 a month with a refinance that had $2,000 in closing costs, you’ll recoup your costs in 20 months.

If you plan to keep your home for at least that long, the refinance makes financial sense. You might even consider paying mortgage points for a lower rate if you’re living in your forever home. The long-term interest savings could pay off despite the longer break-even timeline.

What to do if you can’t refinance but need payment relief

A refinance loan may not be possible if your credit scores have already taken a hit from late payments or you’re behind on your mortgage. Taking action quickly can help delay or stop a potential foreclosure.

• Contact your servicer. Your mortgage payment statement should have contact information. Call and talk to a representative, and make sure you get a written copy of any relief options you discuss with the lender.
• Prepare documentation of your hardship. Lenders will typically send you a form to complete that would outline your monthly expenses and income. Send the requested information and follow up on the status frequently.
• Request a forbearance. In certain situations, lenders may allow you to stop making payments for a set period of time if you request a mortgage forbearance. Make sure you understand what happens to the interest that accrues and if your payment will be affected after the forbearance period ends.
• Contact a HUD counselor. The Department of Housing and Urban Development (HUD) provides a list of certified HUD counselors who can help you navigate your options for free. The HUD website features a list of foreclosure avoidance counselors.
• Don’t pay fees for foreclosure prevention help. The first sign you’re dealing with a mortgage relief scam is being pressured to pay upfront for help. Foreclosure prevention services are offered free by certified HUD counselors.