If you own a home, there's a good chance you'll at some point. Few borrowers stay with their original mortgage for a full 30 years; most either refinance or sell the property long before the original loan is paid off.
People refinance a home loan for many reasons. Often, it's because they can get a refinance rate that's better than the mortgage rate they currently have. Or they may be able to pay off their loan faster by refinancing to one with a shorter term and lower rate.
Refinancing a home loan may seem like an intimidating process, especially if you've never done it before. There's a lot of money involved and you're dealing with mortgage lenders who are more financially savvy than you are. On the other hand, it's a consumer transaction performed by hundreds of thousands of homeowners every year. So it's less daunting than you may think.
Home loan refinance rates
One of the main reasons people refinance a home loan is to get a lower rate. Home loan refinance rates are generally identical to the rates on a home purchase mortgage for a borrower with an identical credit and financial profile – you don't pay a higher or lower rate just because you're refinancing.
The loan refinance rate you pay is determined by a number of factors. Rates vary over time due to market forces, so refinance rates today may be lower the rate you're currently paying, creating an opportunity to save some money.
Today's Mortgage Rates
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Your loan refinance rate is also affected by your credit score, amount of home equity, debt-to-income ratio and the length of the loan. You can also buy a lower rate by paying for discount points. Rates and fees also vary from lender to lender, so you want to be sure to shop around when refinancing a home loan to be sure to get the best deal.
For rate quotes tailored to your credit and financial profile, you can use the form at the top of the page.
How does refinancing work?
People often refinance a home loan because they can get a lower mortgage rate than they're currently paying. Or they may be looking to shorten their loan term to pay it off faster. Some do it to switch loan types, such as from an adjustable-rate mortgage (ARM) to a fixed-rate loan. Yet another option is a cash-out refinance, which is a combination of a home equity loan and a refinance in the same package.
The definition of "home loan" also includes home equity loans and home equity lines of credit (HELOCs), which can be refinanced as well. But that's less common than refinancing the primary lien used to purchase the property.
Any kind of loan can be refinanced, including mortgages, auto loans, business loans, etc. But our focus here will be on refinancing home loans.
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Getting the best refinance rates
When people refinance a home loan, one of the main things they want to know is how to get the lowest rates. Here are the key things to know:
- Interest rates on a home loan refinance are comparable to regular mortgage rates. You don't pay a higher rate just because you're refinancing your home.
- Loan refinance rates vary over time in response to market conditions. The rate an individual borrower will pay depends on a number of personal factors, including credit score, the amount of home equity they have and the type of loan they're getting.
- Interest rates for home loan refinancing vary from lender to lender, so it pays to shop around. Don't simply go for the lowest rate you see advertised – check out the fees as well. Many home loan refinancing companies charge higher fees as a way of offsetting a low advertised rate.
- Don't just check advertised rates. Request personalized rate quotes to find out exactly what a lender will offer someone with your borrower profile. Get at least three, preferably more. You can call lenders directly or use a rate request form like the one at the top of this page to obtain quotes from several lenders at once.
- One way of getting lower refinance mortgage rates is by paying for discount points. Discount points let you buy a lower rate by paying an additional fee up front. For every one percent of the loan amount you pay (a single point), the rate is reduced by a certain amount, often one-eighth to one-quarter of a percent. Buying points can make good financial sense, particularly if you plan to stay in the home a long time.
- Unfortunately, discount points are sometimes used by lenders to disguise the true cost of a loan. A low rate that includes two or three discount points may be more costly than a higher rate with no points. Most refinance interest rates that you see advertised will include discount points, often in fractions of a point. So you need to pay attention to them when comparing refinance rates from different lenders.
- A handy way of comparing the "true" cost of various loan refinance offers is to check the APR, or annual percentage rate. This is a way of expressing the total cost of a home loan – the rate and fees, in terms of an interest rate – the lower the APR, the lower the total cost of the loan. It's not 100 percent reliable – it assumes you won't sell the home or refinance again before the loan is paid off, and it's not very useful with adjustable rate mortgages – but it's a good way to make an overall comparison.
Why do people refinance home loans?
There are many reasons for refinancing a home loan. Here are some of the more common ones:
- To get a lower rate: If mortgage rates have fallen or your credit has improved since you took out your current home loan, you may be able to get a lower rate by refinancing.
- To pay off your home loan faster: You can often cut years off your mortgage and save tens of thousands of dollars in interest if you refinance your home loan to a shorter term. For example, if you've got 20 years left on your loan, you might refinance into a 15-year fixed-rate mortgage and pay it off five years faster. Because short-term home loans have lower rates than longer ones do, you can often do this with little or no increase in your monthly payments.
- To borrow money: You can borrow money through a cash-out refinance. Let's say you owe $100,000 on your mortgage and your property has been assessed at $300,000. You might refinance into a new home loan of $150,000 and receive $50,000 in cash. It's really a type of home equity loan. This works particularly well if you can also lower your mortgage rate at the same time.
- To consolidate debt: A cash-out refinance can be used to consolidate debt. You simply use the proceeds to pay off credit cards, medical bills, a second mortgage or any high-interest loans. Your loan refinance rate will likely be lower than the rates you were paying and you get to consolidate your bills into a single monthly mortgage payment.
- To change mortgage types: People sometimes use a home loan refinance to exchange an adjustable-rate mortgage (ARM) for a fixed-rate one. This may be because their ARM is about to readjust and they want to lock in a predictable rate.
- To eliminate mortgage insurance: Borrowers who put less than 10 percent down on an FHA loan after June 3, 2013 must carry mortgage insurance for the life of the home loan. However, they can still get out of it by refinancing once they reach 20 percent home equity, at which point mortgage insurance would not be required on the new loan.
- After a divorce: A refinance is necessary to remove a person's name from a home loan after a divorce. Otherwise, even if the divorce papers give the home and responsibility for the mortgage to your ex-spouse, the lender could still come after you if your ex does not keep up the payments. And that could hurt your credit as well.
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When to refinance a home loan?
You can refinance a home loan almost any time you like. But there are a few potential limitations.
Most lenders are reluctant to consider an immediate refinance shortly after you bought the home or previously refinanced; they like to see that at least one year has passed since you took out the last home loan. That isn't a hard and fast rule, though.
A more common concern is that some home loans have prepayment penalties if you refinance them or otherwise pay them off within 3-5 years. That doesn't prevent you from refinancing but does make it more expensive. You often find these on "no closing cost" home loans where the lender charges a higher rate to make up for waiving the closing fees, or on home loans to borrowers with weak credit.
Sometimes, when refinance rates are falling or when they've bumped up recently, people wonder if they should wait to see if they'll fall further or go back down before refinancing. This is rarely a good idea. Refinance rates are unpredictable, even for professionals, and no one knows that they may do next week or a year from now. The best rule is that if it makes financial sense, go ahead and refinance and don't worry about where rates might be headed down the road.
When does refinancing make sense?
When refinancing to a lower mortgage rate, the key factor is whether you'll save money. In other words, will you save enough with a lower rate to offset the closing costs you pay to refinance? So how do you know if refinancing is a good decision? When should you refinance?
The usual guideline is that you should be able to reduce your rate by a full percentage point when refinancing, though that isn't a strict rule. A more reliable way is to calculate your break-even point – that is, how long will it take your cumulative savings from a lower rate to exceed the fees you paid to refinance?
If you can reach your break-even point in 3-4 years, you'll likely benefit from refinancing. Much longer than that and you may sell the home before you break even - people tend to move every five years or so. However, if you expect to remain in the home a long time, you could still come out ahead even if it takes you seven or eight years to reach your break-even point.
A refinance mortgage rate calculator can be a useful tool here. Many of them are set up to help figure your break-even point automatically.
You'd do a similar calculation if you're thinking about consolidating a home equity loan or other second mortgage into your primary home loan. What would the closing costs be and how much would you save each month by rolling the two loans together?
When refinancing to a shorter term home loan, the key is whether you can do so while keeping your monthly payments affordable. If you've got 20 years left on a your mortgage and can refinance to a 15-year loan with only a small increase in your monthly payments, it would probably be worthwhile to do so. But you don't want to strain your budget, no matter how much you'd save over the long term.
On a cash-out refinance loan, the question is whether that would be a more affordable choice than other options for borrowing the money, such as a home equity loan or line or credit. Because you're paying refinance closing costs on the entire home loan, this option works best if you can reduce your mortgage rate at the same time, or are borrowing a large sum of money.
The decision whether to refinance out of an ARM is a subjective one. How much of an increase in your mortgage rate can you afford? How uncertain are you about the direction rates are headed? The question here is whether you want to buy financial predictability by refinancing.
How to refinance your home loan?
Refinancing a home loan is nearly identical to the process of obtaining a mortgage to buy a home. You submit an application, the lender reviews your credit and financial information, and if you're approved, your refinance should be finalized in 4-6 weeks.
With home refinance loans, your home equity plays the same role your down payment did when you took out the original mortgage – it represents the portion of the home's value that is paid for up front, so the lender isn't covering the entire value of the home. An assessment will usually be performed to determine the home's value and how much equity you have.
When checking out home refinance companies, remember that rates and fees will vary from lender to lender. Don't just look at the rates - that could be an apples-to-oranges comparison if you don't consider fees as well. Do your homework and check out at least three lenders, preferably more. See the "Getting the best refinance rates" section above for more on comparing rate offers from different lenders.
Once you've chosen a lender you'll need to submit a mortgage application, much as you did when you bought the home. These days, you can often do this online. You'll likely have to pay an application fee, usually $100-$300, to get the process started. You shouldn't have to pay any further fees until the closing itself.
At closing, you'll need to bring a check to cover the closing costs, unless you're having them financed as part of the loan. Closing costs are typically 2-6 percent of the loan amount, with costs in the higher end of the range associated with buying multiple discount points.
The loan refinance closing is normally held at your lender's offices. If refinancing with an online lender, a local office is not required – the closing may be held at the office of a local title agency or attorney.
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Where can I refinance a home loan?
You can refinance home loans with any lender – you don't have to stay with your current one. A refinance is a new start – you take out a new mortgage, your new lender pays off your old one and you go forward from there.
It's a good idea to shop around to find the best place to refinance home loans – where you can get the best refinance mortgage rates and terms. Home refinance programs and options can vary greatly. You want to compare offers from at least three different lenders, and perhaps even more.
When shopping around for a refinance lender, you want to do more than just compare home loan refinance rates. You need to take into account the fees and other terms as well. A convenient way to do this is by looking at the APR, which is a way of expressing the total cost of a loan in terms of an interest rate. It's a good place to start but isn't 100 percent accurate, particularly if you expect to sell the home or refinance again in a few years.
Most lenders allow you to shop for a home loan online these days. Home loan refinance rates today are commonly listed online, which makes it easy to obtain and compare rate quotes from multiple lenders. Many can even do the entire application online as well, which can greatly simplify the process – you can submit your documentation, receive updates, get and respond to requests for additional information – the works. The lender doesn't even need to have an office in your community –the closing is often handled at the office of an attorney or title company.
A convenient way to get started is by submitting a request for personalized rate quotes using the form at the top of this page. You'll quickly receive quotes for refinance rates from up to three lenders tailored to your personal situation, allowing you to easily compare offers in real time and see which one is best for you.Get Started
Qualifying to refinance a home loan
- Qualification guidelines to refinance a home loan are pretty much the same as they are for a mortgage to buy a home. Credit and income requirements are practically identical and the home must still appraise for enough to support the loan. Your home equity replaces the down payment you'd make when purchasing.
- Credit score requirements vary from lender to lender but have loosened considerably in recent years. It's now often possible to do a home loan refinance with bad credit; many lenders will approve refinancing for borrowers with scores of 620 or lower. Some lenders will approve refinancing into an FHA loan for those with credit scores in the mid-500s.
- On income, your new mortgage payments, including taxes and insurance, should not exceed 28 percent of your monthly income, and total debt payments should be no higher than 41 percent. Lenders may go above these limits for borrowers with excellent credit, however.
- You generally want to have at least 20 percent home equity to refinance a home loan. Lenders may go lower than that, but you'll have to pay for mortgage insurance, the same as you would when buying a home with less than 20 percent down.
- If you have little or no home equity, there are still options available to you. An FHA Streamline refinance allows those who currently have an FHA loan to refinance into a new one without a property appraisal. Income and credit requirements may be waived as well. A similar streamline refinance option is available to VA loan borrowers.
- Low or negative-equity homeowners with conventional mortgages (those backed by Fannie Mae or Freddie Mac) can refinance through HARP, a federal program. HARP is scheduled to be replaced by a streamline refinance option in Fall 2017.
What does it cost to refinance a home loan?
Home loan refinance costs are about the same as those for a purchase mortgage, except that you don't have the real estate fees associated with transferring the ownership of the home.
Expect to pay about 2-6 percent of the loan amount when refinancing a home loan. Costs at the high end of this range are associated with paying for multiple discount points, which are a way of buying a lower refinance rate and cost 1 percent of the loan amount per point. Costs will also vary depending on where you live, with some areas charging higher recording fees and taxes.
Lenders sometimes advertise what's called a "no cost refinance," one where nearly all closing costs and fees are waived. But they compensate for this by charging higher refinance rates on these loans than they would if the fees were paid separately or rolled into the loan amount. You need to compare the costs over time to see which is the better deal.
Sure! You can refinance a home equity loan or other second mortgage the same as you can refinance your primary home loan. The process is largely the same – you take out a new second mortgage that pays off your existing one and gives you a lower rate or better terms.
You can also refinance a second mortgage through a cash-out refinance of your primary home loan. You use the proceeds from refinancing to pay off your second mortgage and simply roll everything into your primary mortgage. That way, you only have a single payment to worry about, and may get a lower interest rate as well.
What about a loan modification vs. loan refinance?
A home loan refinance is when you replace your current mortgage with a new one with different terms. A loan modification is changing the terms of your current mortgage to make it more affordable, such as by reducing or rescheduling payments.
Home loan refinancing is considered the better option. Loan modifications are for borrowers in financial difficulty who can't get approved for a refinance. You need your lender's approval for a loan modification, which can be difficult to get. Basically, your lender needs to be convinced they're better off cutting you a little slack on your home loan so you don't go into foreclosure.
With a home loan refinance, on the other hand, you don't need your current lender's approval. You can go to any mortgage lender and, if you meet their qualifications, refinance your home loan through them and use it to pay off your old lender.