If you own a home, there's a good chance you'll do a home loan refinance 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 full term runs its course.
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.
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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.
Home loan 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.
What is refinancing?
What does loan refinancing mean? It's when you take out a new loan and use it to pay off an older one. You're simply replacing one loan with another. Borrowers do this because the new loan offers certain advantages over the old one, such as a lower interest rate or faster payoff.
Any kind of loan can be refinanced, including mortgages, auto loans, business loans, etc. But our focus here will be on refinancing mortgage loans.
Home loan refinancing defined
A mortgage refinance is what usually comes to mind when consumers think about refinancing. Generally, it means refinancing your primary home loan – the one used to buy your home.
Strictly speaking though, a "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.
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How does loan refinancing work?
The process of refinancing a home loan is very similar to what you went through when getting a mortgage to buy your home. You submit a similar application and provide the same type of financial and credit information. An appraisal of the property is usually required. The main difference is that you don't have the paperwork associated with the purchase of the home.
Once you've submitted your application, it usually takes 4-6 weeks for the loan refinance to be approved. Once the refinance is approved and you sign the paperwork, your new lender immediately pays off the balance on your old home loan. From then on, your new lender holds your loan and you make your payments to them.
You start the process by looking for the best home loan refinance company to meet your needs. You do not have to refinance with the same lender who has your current loan. This means you can shop around for the lender who will offer you the best loan refinance rate and terms.
You can do this several ways. You can check the advertisements of various mortgage lenders to see which ones offer the best rates and terms, or you can simply visit their web sites to see what rates they're currently offering. The best refinance companies all list their rates online these days.
You can also use a form such as the one at the top of this page to obtain personalized home loan refinance rate quotes from a number of lenders. Since these are based on your actual credit, finances and home equity, they're likely to be more accurate than generic rates listed in ads or online.
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 your property is worth $250,000 and you owe $100,000 on your home mortgage. You might do a refinance for 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. Mortgage interest is usually tax-deductible as well.
- 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 loan refinance is necessary to remove one person's name from a mortgage after a divorce. The divorce papers may give the home and responsibility for the home loan to one person, but home loan companies may still come after the ex if that person does not keep up the payments.
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When to refinance a home loan?
You can refinance your home loan 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 home loan; 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 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 increase the cost. 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.
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 there's a good chance 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.
People refinance a home loan for many reasons. Often, it's because they can get a better loan 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 loan 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 loan refinance rates
- Home loan refinance interest rates 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. 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 loan 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 loan 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 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 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, 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.
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How does home loan refinancing work?
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 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 loan?
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 loan 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 loan 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.
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 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.
When to refinance your home?
So under what situations might you want to refinance a home loan? The most common reason is when mortgage rates have dropped so you can reduce the rate you're paying and save money. But there are a number of others. For example:
- If you're looking to pay off your home loan faster by refinancing to a shorter term, such as switching from a 30- to a 15-year loan. Shorter mortgages have lower rates, so you can often do this with little increase in your monthly payments if you've had your current loan for awhile.
- If your credit has improved, so that you're now eligible for a lower rate than you could get when you bought the home.
- If your finances are tight and you want to reduce your monthly mortgage payments by refinancing your house to a longer mortgage term.
- If you have an adjustable-rate mortgage and want to switch to a fixed-rate loan.
- If you have a second mortgage, credit card debt, medical bills or other debt and want to consolidate it all into your primary home loan by using a cash-out refinance as a debt consolidation loan.
- If you're going through a divorce and need to take one person's name off the mortgage.
Should I refinance my home loan?
Being in one of the above situations doesn't automatically mean you should go ahead with refinancing your home loan. 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 loan 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 home loan 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 loan 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 shorter term to pay your mortgage off faster, the key is whether you can afford the new monthly payments. Chopping five years or so off your home loan 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 loan 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 mortgage 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 home loan 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.
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.
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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.
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.
- 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