Plenty of homeowners want to refinance right now, but the majority are still waiting for mortgage rates to drop. According to Fannie Mae, refinance activity is down by 89% compared to the 2020 refinance boom, when mortgage rates hit record lows.
Should you refinance? The answer depends on your financial goals, your current mortgage rate and your long-term plans for the home. Most homeowners refinance to lower their interest rate or change their loan term, while others turn to cash-out refinances to access extra cash.
Before you start down the path to replace your mortgage with a new one, read on to learn everything you need to know about refinancing and whether it makes sense for you right now.
What is refinancing?
When you refinance a mortgage, you take out another loan that pays off your initial loan. The new loan has a new term, a new interest rate and a new monthly payment amount.
For example, let’s say you initially took out a 30-year mortgage for $350,000 with a 7.5% interest rate. Now, you still owe $330,000, but your credit has improved. You might opt to refinance with a new 30-year mortgage for $330,000 with a 6.5% interest rate.
Why should you refinance?
There are several reasons to consider refinancing. If any of the conditions below apply to you, you might want to start comparing lenders.
If you can get a lower interest rate and save money: The lower your interest rate, the less you’re paying a lender to borrow money. If you can score a rate that is at least a percentage point lower than your current mortgage, it’s worth considering the option.
If you want a new loan term: A new home loan term can make a positive impact on your finances. By shortening the term, you’ll increase the size of your monthly payment but accelerate the date you pay the loan off. On the other hand, extending your mortgage term can stretch out the payments over a longer period and reduce your monthly obligation.
If you’re looking for a new loan type: Some borrowers refinance their mortgage to convert a fixed-rate mortgage to an adjustable-rate mortgage and vice versa.
If you want to access your home equity for cash: If your credit is in excellent shape and you’ve been in the home for a while, you may be able to apply for a cash-out refinance. A cash-out refinance replaces your mortgage with a bigger balance, but you’ll get to put those extra funds to use to remodel your kitchen, or even consolidate credit card debt into a loan with a lower interest rate.
If you want to get rid of FHA mortgage insurance: If you used a Federal Housing Administration mortgage (FHA loan) when you bought a home, you’re stuck with mortgage insurance premiums. But if you have at least 20% equity and can qualify for a conventional loan, you can ditch mortgage insurance through refinancing.
There are plenty of reasons to refinance your mortgage, so make sure you choose the best lender, interest rate and repayment terms that best fit your finances. If interest rates are too high, there are too many fees or you can’t find a lender to work with, you may want to put off refinancing for the time being.
How much does refinancing cost?
Refinancing isn’t free. According to Freddie Mac, the typical homeowner should expect to pay around $5,000 in closing costs. Those costs include some fairly standard expenses like an origination fee from the lender (typically 1% of the loan amount, but this varies by lender), an appraisal to verify the property value and miscellaneous recording expenses.
The cost to refinance can be lower or higher depending on the loan amount and where you live. Some counties and states charge additional taxes, making closing costs even steeper.
Is it worth the cost to refinance?
If your primary objective with refinancing is saving money, you need to weigh the closing costs you’ll pay now against the long-term savings.
This means that if your main goal is saving money, you need to be confident that you plan to stay in the home for at least the amount of time it takes to hit the break-even point. For example, let’s say you pay $5,000 in closing costs. Your break-even point is when your monthly savings total more than your upfront closing costs.
| Existing mortgage payment | New mortgage payment after refinancing | Monthly savings | Months to break even with $5,000 closing costs |
| $2,400 | $2,100 | $300 | 17 |
In this scenario, you’d break even somewhere between 16 and 17 months after the $300 monthly savings add up to more than $5,000. However, if your monthly savings amount to less each month, it will take longer to reach the break-even point.
| Existing mortgage payment | New mortgage payment after refinancing | Monthly savings | Months to break even with $5,000 closing costs |
| $2,400 | $2,250 | $150 | 34 |
In this scenario, it would take around 34 months to reach the point when your monthly savings are greater than the costs you paid upfront for refinancing.
How does mortgage refinancing work?
While you may be new to refinancing, the process is going to feel similar to securing a first mortgage. To lock in a new home loan, follow these steps:
- Choose a lender: To score a good deal on a mortgage refinance rate, you’ll have to look around. Some lenders might offer credits or deals for certain types of applicants. Or you might find that the bank where you have a savings account may offer a small rate discount.
- Apply: To go through the application process, you’ll need to hand over all the details of your personal finances, including pay stubs, tax returns and bank account information.
- Lock or float your rate: If your lender offers the option to lock your rate, that means you can avoid paying a more expensive rate (in the case that interest rates go up) while your new loan receives official approval. You may also be able to float your rate, which can help you take advantage if rates go down from application to closing.
- Wait: Refinancing involves a full underwriting process, where the lender does research on your finances and your home’s value to make sure the loan is worthy of a sign-off. This process varies from lender to lender, but it won’t happen overnight. Plan to wait for five to seven weeks from your application date.
- Verify the home’s value: Part of the waiting game involves an appraisal of the property to assess its fair market value. Your lender will hire the appraiser, and you’ll pay for the service -- typically around $500, though this can be higher if your property is bigger and in a costly area.
- Close: Remember that long stretch of time you had to block on your calendar when you first closed on your home? Well, you can do it all over again. Closing on a refi involves a similar amount of paperwork, although you can likely skip working with a lawyer because you aren’t finalizing a contract with a seller.
When is a good time to refinance?
Figuring out the best time to refinance relies on a few critical steps.
Boost your credit and pay off debt
First, you’ll need to get your credit score in good shape to grab the lowest interest rate available. Most lenders will put 740 and above in the running for their most competitive offers. If you have any outstanding debt aside from your mortgage, like student loans or a car payment, try to pay them off and reduce your debt-to-income ratio. Lenders like to see you have enough cash on hand to pay your mortgage in case anything happens.
Calculate your monthly payments and closing costs
When you’ve determined why you want to refinance your home, see if the change will fit into your budget. For instance, what would your new payments look like under a 15-year mortgage if you want to pay your mortgage off sooner? You can also calculate what a new 30-year loan would look like with a reduced interest rate.
Since refinancing a mortgage means another round of closing costs -- anywhere from 2% to 6% of the loan, you’ll need that cash on hand if your application is approved. Do the math to determine your break-even point that can justify your monthly savings versus your closing costs.
Compare rates and browse lenders
Lastly, get a sense of what’s happening in the market and compare the best refinance rates available now to see how they stack up against your current rate. Start looking to see which lenders offer the best deal. Pay attention to interest rates and fees, but also take into consideration the entire process, including ease of applying, process time and requirements.
You can also look at your bank or credit union or try a private mortgage broker.
Types of refinance loans
The most popular types of mortgage refinancing are rate-and-term refinances and cash-out refinances.
Rate-and-term refinance
With a rate-and-term refinance, you’ll get a new rate and a new term. This refi option is the most traditional approach to replacing your current mortgage. You might switch from a 30-year mortgage to another 30-year mortgage with a lower rate, or you can change to a 15-year mortgage to accelerate your payment plan.
Cash-out refinance
A cash-out refinance allows you to take out a new larger mortgage based on your home equity. You can then use the difference in cash to renovate your home, pay down debts or any other purpose. This option is only available if you’ve accumulated a decent chunk of equity from paying off your mortgage.
Streamline refinance
A streamline refinance involves significantly less paperwork than a typical refinance, but there are some limitations. A streamline refinance is available with FHA- and VA-backed loans. With VA loans, these are referred to as IRRRLs -- Interest Rate Reduction Refinance Loans.
No-closing-cost refinance
There are still costs involved with a no-closing-cost refinance, but a lender will roll those expenses into the total loan amount, so you don’t have to pay anything out of pocket. In the short term, it helps you avoid draining your bank account. In the long run, however, you’re borrowing more money, which means you’re paying more interest.
The bottom line
Is refinancing worth it in an unaffordable housing market? Maybe so. Maybe not. While mortgage rates are much higher than they have been in more than a decade, refinancing could make sense depending on your personal finances and requirements. Always look at your current monthly payment, your outstanding balance, your credit score and how long you plan to stay in your home to figure out if refinancing is right for you.
FAQs
When you refinance, a lender will conduct a hard pull on your credit, and you’ll be closing one account while opening another -- two actions that can wind up making your credit score drop a bit. However, that’s not a major concern. As long as you make your payments on time and manage all your other bills, your score will go back up.
Since each application triggers a hard credit check, multiple applications will tell the credit bureaus that you’re shopping around for the best refinance rate. Instead of multiple hard credit inquiries, only one will show up on your credit score. This means you won’t get hit with many hard credit checks which would cause your score to plummet.
In most cases, you’ll need to wait at least six months from closing to refinance your mortgage. You may need to wait even longer, though. For example, Fannie Mae’s RefiNow program requires at least 12 months between the original loan and a new loan.
You can refinance your mortgage as many times as you want if a lender approves your application. However, it’s important to understand that you’ll pay a sizable chunk of closing costs each time you do it, and most lenders will require a six-month waiting period between closing a loan and refinancing.
You may be able to reduce your monthly payment in a couple of ways. You can ask your lender if mortgage recasting, which may shrink the size of your payments, is an option. Additionally, if you’re paying private mortgage insurance each month, you may want to consider paying for an appraisal. If your home’s value has increased enough, you may now have 20% equity in the property, and your lender will no longer need that PMI premium.
No. A second mortgage is an additional loan against the value of your home -- a home equity loan or a HELOC, for example -- in addition to the first mortgage you’re currently paying. A refi, on the other hand, replaces the original mortgage with a new loan.
Once you choose a lender, see if you can lock in your interest rate. Since interest rates fluctuate often, yours could go up any time before closing. But if you lock in your rate, it won’t change even if the market causes refinance rates to rise. Rate locks typically last 30 to 60 days (sometimes longer, depending on your lender), which is usually how long it takes to close on a new loan.