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As a homeowner, there are a few scenarios where refinancing a home loan can make sense. Chief among them is to reduce the interest rate on your mortgage and make your home more affordable. Other common reasons for refinancing are to change your loan terms or to use a cash-out refinance to take equity out of your home. Here's what today's mortgage refinance rates look like.
When you refinance a mortgage, your old home loan is replaced by a new one with different terms. A refinance, also known as "refi," involves trading your current loan for a new one, and it is common in the context of mortgages. In some cases, people use a refinance loan to switch to a lower interest rate. But that's not the only reason for mortgage refinancing. Homeowners may also refinance to change the terms of their mortgages -- for example, switching from a 15-year fixed-rate mortgage to a 30-year loan to reduce monthly payments. They might also want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan or remove someone from a joint mortgage agreement.
Refinancing works by swapping one loan for a new one with different terms. Refinancing doesn't just apply to mortgages -- you can also refinance an auto loan, personal loan, or other loan. When you refinance a mortgage loan, you'll need to go through the whole loan application process again. This includes rate shopping, submitting documents, and paying closing costs. Your refinance lender will check your credit score, just as it would with a regular mortgage. Good credit will help you secure a better mortgage refinance rate, and if your credit score has improved since your initial mortgage, you may be able to access better terms. A mortgage refinance is different from a loan modification, which changes the terms of an existing loan.
To find the best mortgage refinance rates today, it's a good idea to compare multiple lenders and make sure your credit score is in good shape. It's also important to be clear about why you are refinancing as this will impact your rates and the right loan for you. Here are some steps to to find the best refinance rates:
If you're worried about the impact rate shopping could have on your credit score, know that the scoring systems recognize rate shopping. Your mortgage refinance application will ding your score slightly as it is a hard inquiry on your credit. The trick is to apply to refinance with multiple lenders within the same short time frame. That way, all those hard inquiries will be considered only a single inquiry. For more on finding the best refinancing rates for you, check out our guide on rate shopping.
Some mortgage experts say that refinancing only makes sense if you can reduce your rate by 1%, but this doesn't always apply. Knowing whether it's the right time for you to refinance depends on more than just refinancing rates. Think about your reasons for refinancing, your current mortgage rate, the amount of time you plan to spend in the house, and your wider financial situation. Use a mortgage refinance calculator or learn how to determine if refinancing is worth it.
Mortgage refi rates can fluctuate dramatically depending on the wider economic situation. The 1980s saw some of the highest rates on record, with an average fixed 30-year mortgage rate reaching over 18%, according to Freddie Mac. Interest rates hit record lows in 2020 and have risen steadily since. The Federal Reserve's recent rate hikes have caused mortgage rates to rise significantly in 2022 and into 2023. If you took out a mortgage or refinanced when rates were low, it may be challenging to score a lower rate now.
Use a mortgage calculator to work out how your monthly costs might change. For example, let's say you have an 8% APR on a 30-year fixed-rate mortgage of $300,000. Your monthly principal and interest payment would be around $2,200. Reducing your interest rate to 6% would cut your monthly P&I payments by around $400 and save you around $150,000 in interest across the 30-year loan period. And even though it would likely result in a higher monthly payment, look at 15-year refinance rates as well, as switching to a shorter term mortgage could save you a lot more money in interest in the long run.
On the other hand, if you have a 30-year mortgage on a $300,000 loan with an APR of 3.5%, you might be paying around $1,350 towards the principal and interest each month. Even with good credit, right now you may only be able to qualify for an APR of 6% or more, which would increase that monthly payment to around $1,800 on a refinance mortgage (assuming the same $300,000 loan). That could mean paying $160,000 more in total interest over the life of the loan.
Now, lower current refinance rates are not the only reason people refinance. For example, if you're having financial difficulties, you might wonder if you could take equity out of your home to tide you over. You might even try to lower your monthly payment by extending your loan term. Bear in mind that these options could prove costly in the long run, especially if rates have risen since you took out your original mortgage. Indeed, even if you score the same rate, restarting the clock on your mortgage means you'll pay more in interest in the long run. You'll also have to pay closing costs of between 2% to 5% of your loan total.
You'll pay closing costs to refinance your home loan, just as you would with an initial mortgage. Generally, they are 2% to 5% of your loan amount, though the figure varies from lender to lender and the type of loan. For example, VA loan refinance fees have a different structure than conventional mortgages.
Some of our favorite mortgage lenders for refinancing have below-average fees, but a refinancing home loan is still likely to cost you something. You can pay the fees upfront or roll them into your mortgage and pay them off over time. Review the closing costs and disclosures carefully when comparing refinance offers. Not only may there be some room for negotiation in some of the fees, you could also find a lender that charges a slightly higher APR and lower closing fees is a better value.
Learn more: What are closing costs?
It's a good idea to calculate your break-even point on a home refinance loan -- the point where any savings you make from refinancing will cover your costs -- to know how long you'll have to stay in your home for the refinancing to be worthwhile. Imagine you're looking at a $300,000 home loan and the closing costs are 3% of the loan value. That's $9,000. If you're saving $400 a month, it would take you almost two years to cover those costs. If you're not planning to stay in your home for two years, a refinance may not make financial sense.
Here are some common closing costs:
There are several situations when refinancing makes sense.
If interest rates have fallen since you took out your home loan or your financial situation and credit score have improved, you may be able to swing a lower interest rate on your loan. This could lower your monthly payments. If you're having trouble covering your bills, you might switch from a shorter-term loan to a longer-term one -- that way, you spread your loan balance out over more months. This would reduce your monthly costs, but you would likely pay more in interest over time.
With a regular refinance, you take out a new home loan to cover the remaining mortgage balance. With a cash-out refinance, you borrow more than your remaining mortgage balance and get the rest in cash you can use for any purpose, whether it's making renovations or paying off costlier debt like a credit card balance. Note: Cash out refinance rates tend to be slightly higher than you can find for a rate-and-term refinance.
One common reason for refinancing is to switch from a 30-year loan to a 15-year loan, as a 15-year mortgage refinance rates tend to be lower than their 30-year counterparts. While the monthly payments may be higher, you could score a lower interest rate and the shorter term will mean you pay less interest overall. When 30-year fixed refinance rates are low, some homeowners may also opt to refinance from an ARM to a fixed-rate mortgage to lock in the lower mortgage rates. If a couple with a joint mortgage divorces, they might refinance to take one person off the mortgage altogether. It can also make sense if you used a low down payment mortgage to buy your home, such as an FHA mortgage, and now want to get rid of mortgage insurance.
While refinancing is often a smart move, in these situations, it may not pay.
We learned earlier that there are closing costs that come with refinancing. If you don't plan to live in your home for long, you may not break even from those closing costs and come out ahead. Let's say you refinance to reduce your monthly payments by $250, but it costs $5,000 in closing costs. That means it will take you 20 months to break even. If you think you might move in a year and a half, you could lose money by refinancing.
If you don't have a very good credit score, you may not qualify for a much lower interest rate on a new mortgage. In this scenario, it may make sense to spend time improving your credit before you refinance your home loan.
Generally speaking, if you're refinancing to save money, it only makes sense if you can shave about 1% or more off your existing loan's interest rate. So if you already have a low interest rate on your existing loan, you may not be able to lower it enough to make the hassle and costs of refinancing worthwhile.
Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.
It's essential to shop around to find the best refinance rates. You may find that different lenders have offers that vary widely.
Yes. Homeowners can refinance as often as they'd like, but some lenders may have specific restrictions.
It depends. While there are ebbs and flows in refinancing rates throughout the year due to seasonality, it's best to shop around when the time is right for you.
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