The primary goal of refinancing for most homeowners is to save money by getting a lower mortgage rate. By refinancing, you’ll be replacing your current mortgage with a new one that has a different loan amount and interest rate.
But with refinance rates exceptionally high right now, around 8%, it’s unlikely that homeowners will find a rate lower than the one on their existing mortgage in today’s market. Though refinancing could make sense in a high-rate environment, it all depends on your financial situation and what you plan to do with the cash.
What to know first
During the pandemic, cash-out refinances were all the rage. Homeowners swapped out their old mortgages for new ones with 2% to 3% interest rates and were simultaneously able to take cash out of their homes. But the consistent increase in mortgage rates has led to a drop in refinancing activity. Unless you purchased a house within the past year, it’s unlikely you’ll be able to nail down a mortgage with a lower rate.
Mortgage rates have soared as the Federal Reserve raised its short-term interest rate 11 times since last March to tame inflation, pull back consumer spending and make borrowing more expensive. Improved economic data prompted the Fed to take a break from its rate-hiking cycle. During its meeting earlier this month, the central bank opted to hold its federal funds rate steady and indicated that it might keep it there for a while. Yet, even if the Fed doesn’t carry out another rate hike, it’s unlikely to start actually cutting rates until next year.
“Given the Fed’s rhetoric around ‘higher for longer’ interest rates, it may be a while before refinancing comes back in full swing,” said Alex Thomas, senior research analyst for John Burns Research and Consulting.
Still, many homeowners might be motivated to refinance. “In the current market with elevated rates, we see people doing refinances for very specific reasons, including needing to tap into the equity of the home, taking someone off of a mortgage, or because their adjustable rate mortgage has expired,” said Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage.
Homeowners who would’ve sought refinances to secure a cheaper mortgage rate have instead kept their existing mortgages and turned to home equity loans and home equity lines of credit as a way to get cash out of their properties.
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.
Change lenders
If you don’t like your current lender, refinancing is one way of moving your business elsewhere.
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:
Rate-and-term refinance
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.
Cash-out refinance
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 low 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; and 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
| Product | Interest rate | APR |
|---|---|---|
| 30-year fixed-rate | 7.43% | 7.45% |
| 30-year fixed-rate FHA | 6.40% | 7.31% |
| 30-year fixed-rate VA | 6.53% | 6.64% |
| 30-year fixed-rate jumbo | 7.48% | 7.50% |
| 20-year fixed-rate | 7.17% | 7.19% |
| 15-year fixed-rate | 6.73% | 6.76% |
| 15-year fixed-rate jumbo | 6.74% | 6.75% |
| 5/1 ARM | 6.73% | 7.85% |
| 5/1 ARM jumbo | 6.69% | 7.73% |
| 7/1 ARM | 7.02% | 7.93% |
| 7/1 ARM jumbo | 6.92% | 7.76% |
| 10/1 ARM | 7.62% | 7.85% |
| 30-year fixed-rate refinance | 7.57% | 7.58% |
| 30-year fixed-rate FHA refinance | 6.46% | 7.39% |
| 30-year fixed-rate VA refinance | 6.57% | 6.77% |
| 30-year fixed-rate jumbo refinance | 7.64% | 7.65% |
| 20-year fixed-rate refinance | 7.34% | 7.36% |
| 15-year fixed-rate refinance | 6.80% | 6.82% |
| 15-year fixed-rate jumbo refinance | 6.82% | 6.83% |
| 5/1 ARM refinance | 6.67% | 7.68% |
| 5/1 ARM jumbo refinance | 6.78% | 7.50% |
| 7/1 ARM refinance | 6.97% | 7.84% |
| 7/1 ARM jumbo refinance | 6.81% | 7.72% |
| 10/1 ARM refinance | 7.67% | 7.85% |
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 been rising due to the Federal Reserve’s interest rate hikes, 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.
FAQs
There may be a slight difference between average refinance rates and average rates for purchase loans (the initial mortgage taken out on the home). The bigger difference between buying a new home and refinancing your current mortgage tends to be with the closing costs. The closing costs for refinances are lower, averaging less than 1% of the total loan amount. There are some exceptions, however, in New York, Pennsylvania and Delaware, where closing costs are significantly higher.
Refinancing involves paying closing costs, though the costs tend to be lower than with a new purchase loan. You should expect to pay 2% to 5% of the total mortgage value depending on the size of the loan, though you may be able to roll closing costs into your loan balance. In 2021, the average closing costs to refinance a mortgage for a single-family home added up to $2,375, according to data from ClosingCorp. That figure doesn’t include any local taxes, however, which can add thousands in certain parts of the country.
To figure out if refinancing makes financial sense, you need to determine your break-even point, i.e., when your projected savings are greater than the costs associated with refinancing the loan. This ultimately comes down to how long you plan to live in the home. For example, if you’re going to pay $6,000 to refinance your mortgage for a lower rate, you’ll need to determine if you’ll be in the home long enough for the total monthly savings to add up to more than $6,000.
