Refinance Mortgage

If you own a home, there's a good chance you'll do a mortgage refinance at some point. Few borrowers stay with their original home loan for a full 30 years; most either refinance or sell the property long before the full term runs its course.

Refinance mortgage rates

One of the main reasons people refinance a mortgage is to get a lower rate. Refinance mortgage 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 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.

Your 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 mortgage 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.

Mortgage refinance explained

While many borrowers refinance mortgage loans, it's still something that a lot of people are unfamiliar with. So we'll go through it one step at a time.

How we define refinancing, mortgage

A mortgage refinance is what usually comes to mind when consumers think about refinancing. Generally, it means refinancing your primary mortgage – the one used to buy your home.

Strictly speaking though, to define "mortgage" means any loan secured by the value of your home. So a home equity loan or home equity line of credit (HELOC) are mortgages as well. Those can also be refinanced. But most of the time, a "mortgage refinance," means refinancing the primary lien on your home.

Why do people refinance?

There are many reasons for refinancing a mortgage.  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 mortgage, you may be able to get a lower rate by refinancing.
• To pay your mortgage off faster: You can often cut years off your loan and save tens of thousands of dollars in interest if you refinance your mortgage to a shorter term.  For example, if you've got 20 years left on your mortgage, you might refinance into a 15-year fixed-rate mortgage and pay it off five years faster. Because short-term mortgages 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 your property is worth $250,000 and you owe $100,000 on your mortgage. You might do a home refinance for a new mortgage 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 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. Mortgage interest is usually tax-deductible as well.
• To change mortgage types: People sometimes use a home 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 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 one person's name from the mortgage after a divorce. The divorce papers may give the home and responsibility for the mortgage to one person, but home loan companies may still come after the ex if that person does not keep up the payments.

When to refinance?

You can refinance your mortgage almost any time you like. There's no real "season" for refinancing, so there's no need to wait for any particular time of year to refinance.

There are a few potential limitations, though. Most lenders are reluctant to consider an immediate refinance right after you took out a mortgage; they usually like to see that at least one year has passed. That isn't a hard and fast rule, though.

A more common concern is that some mortgages have that some mortgages 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 increase the cost. You often find these on "no closing cost" mortgages where the lender charged a higher rate to make up for waiving the closing fees, or on loans to homebuyers with weak credit.

Home refinance

A home refinance is the same thing as a mortgage refinance. Refinancing a home is when you refinance the mortgage used to purchase it. The terms can be used interchangeably.

People refinance a home for many reasons. Often, it's because they can get a better refinance rate than the mortgage rate they currently have. Or they may seek to pay off their home loan faster by refinancing to a shorter loan term at a lower rate. 

Refinancing your home may seem like an intimidating process, especially if you've never done it before. There's a lot of money involved and you'll be dealing with lenders who are probably more financially savvy than you are.  On the other hand, it's a consumer transaction that benefits hundreds of thousands of homeowners every year. So you can complete it successfully as well.

Home refinance rates

• Home refinance interest rates are comparable to regular mortgage rates. You don't pay a higher rate just because you're refinancing your home.
• Refinance rates vary over time in response to market conditions. However, the actual rate you pay will also be determined by a number of personal factors, including your credit score, the amount of home equity you have and your debt-to-income ratio.
• Home refinancing interest rates also 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 refinancing companies charge higher fees as a way of offsetting a low advertised rate.
• One way of getting lower refinance mortgage rates is by paying for discount points. Discount points let you buy a lower rate – 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.
• Most home refinance interest rates that you see advertised will include discount points, often in fractions of a point. Buying points can make good financial sense, particularly if you plan to stay in the home a long time. But you also need to be aware of them when comparing rates among lenders.
• A handy way of comparing the "true" cost of various refinance offers is to check the APR, or annual percentage rate. This is a way of expressing the total cost of a loan, both the rate and fees, in terms of an interest rate  – the lower rate, 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. 

How does refinancing a home work?

A home refinancing 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 everything checks out, your refinance should be approved 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.

You typically want to have at least 20 percent home equity when refinancing, so you don't have to pay for private mortgage insurance (pmi) on the new loan. However, this is not an absolute requirement and you can often refinance your home with less than 20 percent equity, though you may be charged a higher rate than other borrowers with more equity.

What does it mean to refinance your home?

At its basic level, a home mortgage refinance is pretty simple. You're simply replacing one loan with another. You use the home refinance loan to pay off your current mortgage, and from then on, you make your mortgage payments to your new lender.

Often, people do a home loan refinance because they can get a lower mortgage rate than they're currently paying. Or they may be looking to pay their loan off faster or switch loan types, such as from an adjustable-rate mortgage (ARM) to a fixed-rate.

How to refinance your home?

The process of refinancing a home loan begins with shopping for a lender. Different home refinance companies will offer different rates and terms, so you want to check out several. Different loan offerings are often targeted to different types of borrowers as well – some may be better deals for borrowers with excellent credit, some for borrowers with flawed credit, some for borrowers refinancing a condominium, etc.  Do your homework and check out at least three lenders, preferably more.

When comparing home refinance rates, remember that rates and fees differ from lender to lender, so you're not always making an apples-to-oranges comparison on rates. See the "Home 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 loan 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.

Figure on about 4-6 weeks to get your application approved, with the longer time usually if the lender requires additional information to approve the loan.

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 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.

Should I refinance my home?

Being in one of the above situations doesn't automatically mean you should go ahead with refinancing your house.  You have to determine if you'll get enough value out of refinancing to make it worthwhile.

One of the best ways to determine when to refinance a home is by calculating what's called the break-even point. This is how long it would take for your monthly savings from refinancing to exceed your closing costs.  Three to four years is good, particularly if you think you may be moving in 5-7 years or so. But if you plan to stay in the home a long time, you could benefit from a house refinance even if it takes you 7-8 years to recover your costs.

You can easily determine your break-even point by using a home refinance calculator. These will calculate what your new payments will be, and many will also figure your total interest savings and break-even point as well.

When refinancing a house to a shorterterm to pay your mortgage off faster, the key is whether you can afford the new monthly payments. Chopping five years or so off your mortgage can save tens of thousands of dollars in interest charges, sometimes more, but it won't do you any good if you can't afford the new payments. Fortunately, shorter loans have lower rates, so if you've had the mortgage for a number of years you can often refinance to a shorter term with little or no increase in monthly payments.

One of the other home refinance options is to lengthen your term in order to reduce your monthly payments.  For example, maybe you've got a 30-year mortgage you've had for a dozen years and want to stretch it back out to a new 30 years. This will reduce the amount of principle you're paying each month and, if home refinance rates are favorable, can reduce your total monthly payments as well.

However, you'll end up paying a lot more in mortgage interest over the long term, unless you plan to sell the home within a few years.  For this reason, you should only pursue this option if your finances are tight and you really need to lower your monthly payments.

On a cash-out refinance debt consolidation loan, the question is how much you can save by rolling your high-interest rate debts into your primary mortgage at a lower rate. Mortgage interest is generally tax-deductible as well, so that's a potential benefit as well. However, you have to weigh that against the added risk of putting more debt on your home, which could expose you to foreclosure if you can't keep up with the new mortgage payments.

What does it cost to refinance?

Home 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. 

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Expect to pay about 2-6 percent of the mortgage amount when refinancing. 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.

Can you refinance a second mortgage?

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. refinance?

Refinancing 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.

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 loan so you don't go into foreclosure.  

Further information:

• Mortgage refinance FAQ
• Refinancing a mortgage with bad credit
• FHA Streamline Refinance
• What are the tax implications of refinancing a mortgage?
• Documents you need for a mortgage refinance