A mortgage refinance is when you take out a home loan to replace your existing mortgage. You’ll also get a new loan term and interest rate with your new mortgage.
For many people, the primary goal of refinancing is to save money by getting a lower mortgage rate. But with mortgage interest rates still high, few homeowners can save enough money to justify the effort of refinancing.
However, you might consider refinancing for other reasons, such as changing your loan term or type. It all depends on your personal circumstances and what you plan to do with the cash.
Current refinance interest rates and trends
During the pandemic, many homeowners jumped at the opportunity to refinance their existing mortgages because they could secure new, lower rates.
In early 2022, mortgage rates began to soar in response to high inflation and the Federal Reserve’s aggressive rate-hiking strategy. The Fed hasn’t hiked rates since July, and it plans to make its first rate cut later in 2024 as long as inflation continues its downward trajectory.
Since the start of the year, mortgage refinance rates have sat between 6% and 7%. Mortgage rates are projected to creep lower throughout the year, but the days of rock-bottom rates in the 2% range aren’t expected.
For now, homeowners who can save money by refinancing are likely those who bought when rates were at their peak above 8%, according to Alex Thomas, senior research analyst at John Burns Research and Consulting. As the Fed starts to cut interest rates and mortgage rates move lower, refinance activity should pick up.
“The Fed has signaled that they expect to cut rates this year, but they haven’t given us a timeline, and there’s a lot of year left,” Thomas said.
What is refinancing?
When you refinance your mortgage, you pay off your existing mortgage with a new home loan that comes with new rates and terms. If you secured your existing mortgage when interest rates were higher than they are today, refinancing at a lower rate can save you money on your monthly payment or allow you to pay off the loan faster (and sometimes both).
Reasons to consider refinancing
There are many good reasons to refinance when conditions are right. Some of the most common scenarios include:
Reduce your monthly payments
Switching to a new loan with a lower interest rate or longer repayment term can reduce your monthly mortgage payment. The amount you’ll save each month depends on the size of your mortgage and how much lower the new interest rate is compared to your previous loan. Most experts recommend refinancing if you can reduce your interest rate by 0.75%.
Pay off your mortgage sooner
If your original mortgage was a 30-year loan, you could refinance to pay it off sooner. With a lower interest rate, you may be able to switch to a 15-year loan and still have a manageable monthly payment. Reducing the length of the mortgage also lowers the total amount of interest you’ll pay over the life of the loan.
Getting cash out of your home
With a cash-out refinance, you apply for a new loan that’s larger than what you owe on your old loan -- and take the difference as a cash payment. Many homeowners use a cash-out refinance to pay for home improvements.
Switch to a fixed-rate loan
If you have an adjustable-rate mortgage, switching to a fixed-rate loan could be a good move. Refinancing can help you reduce future risk, according to Jason Fink, a professor of finance at James Madison University in Harrisonburg, Virginia. Locking in a fixed rate provides both predictability and protection from future rate increases.
Eliminate private mortgage insurance
Most loans require private mortgage insurance if you put less than 20% down when buying a home. As home prices have increased, you may have crossed the 20% equity threshold, creating an opportunity for you to refinance without PMI. (You can also ask your current lender to eliminate the PMI without refinancing.)
Reasons to not refinance
Fees are too high
While refinancing can save money in the long run, you’ll need to pay upfront closing costs that can add up to thousands of dollars.
Interest rates are higher
If the interest rates have increased and your repayment term is the same, your payments will increase and you won’t save money.
You’re planning on moving soon
It could take a few years to recoup your refinance fees. If you expect to move in a few years, the trouble and expense of refinancing now might not make sense.
You’re nearly finished paying off your mortgage
Mortgages are designed so that your highest interest payments come during the early years. The longer you’ve had the mortgage, the more your monthly payment goes to paying off the principal. If you refinance later in the loan term, you’ll revert to primarily paying interest instead of building equity.
Different types of refinancing
There are a few different options for refinancing a mortgage. Here’s a breakdown of some of the different ways to replace your current home loan:
A rate-and-term refinance replaces your mortgage with a new rate and/or term with one of two goals: save money or pay off the loan faster. For example, you might decide to refinance a 30-year mortgage with a 7.5% interest rate with a new 30-year mortgage with a 6.5% interest rate to reduce your interest charges. Or you might have 20 years left on a 30-year mortgage and opt to refinance to a 15-year mortgage -- ideally with a lower interest rate -- to accelerate your payoff timeline.
A cash-out refinance replaces your existing mortgage with a new loan that’s worth more than your current loan. The goal with a cash-out refinance is to tap into your home equity and borrow cash at a lower rate to cover a major expense such as remodeling your kitchen or paying for college.
FHA or VA streamline refinance
If you have a mortgage backed by the FHA or the VA, you may be able to qualify for a streamline refinance. This “streamlines” the process by eliminating some of the additional paperwork involved, including a new home appraisal or proof of income documentation. VA streamline refinances are commonly known as a VA IRRRL, or Interest Rate Reduction Refinance Loan.
How to get the best refi rate
Getting the lowest refinance rate available is similar to getting the lowest rate possible on a new purchase loan: It starts with your personal finances. Evaluate your credit report at least 30 days before you apply for a refinance. If there is any incorrect information, dispute it. Creditors have 30 days to confirm the accuracy of the information or remove it from your report. Removing inaccurate information can improve your credit score and possibly help you qualify for a lower interest rate.
Taking steps to improve your credit, including paying off credit cards, can lower the risk associated with your new loan. It’s also important to compare options from multiple lenders. In addition to scoring the lowest rate, shopping around can help you find options with lower fees to help save on your closing costs.
Current mortgage and refinance rates
|30-year fixed-rate FHA
|30-year fixed-rate VA
|30-year fixed-rate jumbo
|15-year fixed-rate jumbo
|5/1 ARM jumbo
|7/1 ARM jumbo
|30-year fixed-rate refinance
|30-year fixed-rate FHA refinance
|30-year fixed-rate VA refinance
|30-year fixed-rate jumbo refinance
|20-year fixed-rate refinance
|15-year fixed-rate refinance
|15-year fixed-rate jumbo refinance
|5/1 ARM refinance
|5/1 ARM jumbo refinance
|7/1 ARM refinance
|7/1 ARM jumbo refinance
|10/1 ARM refinance
How to apply to refinance my home loan
1. Get your credit in great shape: While conventional lenders will approve refinance applications with a credit score of 620 or higher, the best rates go to borrowers with scores of 740 or higher.
2. Figure out how much home equity you have: How much is your house worth? And how much money do you still owe on your current mortgage? The difference is your home equity. Simply put, the higher equity, the better you’ll look in the eyes of a lender.
3. Compare multiple offers: You don’t have to refinance your mortgage with your current lender -- though it’s worth starting with them to see what they can offer. Some lenders will waive certain fees for current borrowers who want to refinance. Make sure you compare other options, though. Comparison-shopping is the key to saving money, whether you’re shopping for groceries or a new mortgage.
4. Lock your rate: Rates have increased substantially since the Federal Reserve started hiking interest rates, so it’s important to lock in a rate once you find one that suits your needs. If you don’t, you could wind up paying more. Make sure you ask about a float-down rate lock, which lets you take advantage of lower interest rates if they become available.
5. Communicate: Once you settle on a lender, it’s important to be responsive to requests for financial documentation. The faster you respond, the faster you’ll be able to close on the new loan, and the faster you’ll be able to start saving money with your lower rate.