With mortgage rates stabilizing after years of rising, the opportunity to refinance your mortgage may present itself sooner than you think.
You can refinance to lower your interest rate or monthly mortgage payment, shorten your loan term, get rid of a variable rate loan in favor of a fixed rate, eliminate expensive mortgage insurance, or reduce some of your home equity. You might want to take advantage of it.
Here's what you need to know about refinance rates, current refinance trends, and how refinancing works.
Current refi mortgage interest rates
According to Zillow, the average refinance interest rates for different types of mortgages are:
conforming loan
Government-backed financing
jumbo loan
How does a mortgage refinance work?
Mortgage refinancing involves replacing your existing mortgage with a new mortgage. They often come with lower interest rates, different loan terms, or other features that can help you improve your finances in some meaningful way.
The refinancing process is similar to getting approved for a purchase mortgage. However, it is generally faster because there are fewer steps and no home inspection or negotiation with the seller is required.
However, you should know that while refinancing is a financially smart move, it's not free.
Costs of refinancing a home loan
Like traditional mortgages, refinancing your mortgage has closing costs of approximately 2% to 6% of the loan amount. So if you refinance the interest rate and term on a $300,000 loan, you could potentially pay between $6,000 and $18,000 in refinance closing costs.
Here are some of the costs that may appear on your refinance loan estimate.
Lender origination fee. Appraisal fee. Title search and insurance premiums. Loan application fee. Survey fee. Attorney fees (if required in your state). Recording fee. Prepayment penalty (if your current loan servicer charges a penalty).
Types of home loan refinance loans
There are several types of home loan refinance loans to choose from. The most common options are:
Interest rate and term refinance: This is the most popular refinance option as it allows you to lower your interest rate or shorten your loan term. Shortening your loan term typically lowers your interest rate and saves you a lot of money in interest over your lifetime, but it also means your monthly mortgage payments will be higher. Cash-Out Refinance: With a cash-out refinance, you can leverage the equity in your home by replacing your existing loan balance with a new, larger loan balance and withdrawing the difference in cash. This money can be used for home improvements, consolidating high-interest debt, or other financial goals. Refinancing with no closing costs: With this option, the lender covers the closing costs instead of charging you a higher interest rate. If you don't have cash upfront to cover closing costs and you might benefit from refinancing, this option is worth considering. Streamlined refinancing: Available to existing FHA, VA, and USDA loan borrowers, these refinance options require less documentation and have an easier application and approval process.
When is the right time to refinance your home? Here's how to decide
Refinancing makes the most sense if you can measurably improve your financial situation in some way. It may be worth considering refinancing your mortgage if:
“Refinancing opportunities are often short-lived,” says Chad Freeman, senior loan officer at Embrace Home Loans in Rockville, Maryland. “The key is to plan and be ready now, rather than pulling the trigger when interest rates fall.My advice is to speak to a qualified mortgage advisor now and take advantage of the opportunity when it arises. It’s about being able to take advantage of it.”
How to get the best mortgage refinance rate possible
To ensure you get the best mortgage refinance rate possible, take these steps before you apply.
Make sure you have 20% equity. If you have less than 20% equity, your lender may charge higher interest rates and private mortgage insurance (PMI). You can check the current value of your home online through our real estate search portal and find out what it's worth. However, your lender may request a property appraisal to obtain a current market value. Get and report your credit score. The interest rate you are offered depends largely on your credit score. Many credit cards and banks offer this access for free. Also, get a free copy of your credit report from the three major credit bureaus at AnnualCreditReport.com and look for any errors that need to be addressed. Please pay off some debt. If you have a large amount of debt, your DTI ratio may be higher, which can affect your borrowing power and interest rate offers. Focus on paying off your credit cards, lowering your credit utilization to less than 30% of each credit limit and lowering your ratios. Look for a refinance loan. Don't settle for the first Refi offer you receive. It's important to research at least three different refinance lenders and compare interest rates, terms, and loan programs to ensure you're not leaving any potential savings behind.
Calculate savings from refinancing your mortgage
Want to know how much you can save by refinancing your mortgage? Let's look at some examples.
Example 1: Refinance rate and term to lower interest rate
Use our mortgage refinance calculator to crunch some numbers. Let's say you've been paying off your existing mortgage for a year with a balance of $300,000 at 7.5% and monthly principal and interest payments of $2,097.64.
If mortgage rates fell to 6%, your new loan would be approximately:
New monthly payment: $1,799 Monthly savings: $299/month Lifetime savings: $72,269 Upfront fee: $6,000 Break-even point: 21 months
Example 2: Refinancing interest rate and term to shorten the loan term.
Using the same starting loan numbers example above, let's shorten the loan term to 15 years and lower the interest rate to 5.5% (a 15-year mortgage has a lower interest rate than a 30-year loan). ). And let's see how the calculation works. Outside:
New monthly fee: $2,451 Additional monthly fee: $354/month Lifetime savings: $278,558 Upfront fee: $6,000
The first scenario would break even in just under two years, while the second scenario would take nearly 18 years to break even. However, in the second example, you can save significantly over your lifetime. In any case, we should approach this with the understanding that it will be a long battle.
Advantages and disadvantages of refinancing a home loan
Please note that not all of these pros and cons apply to all refis. It depends on the type of refi you choose and the loan terms you can get. However, in general, you should consider factors such as:
Strong Points
Possibility to lower monthly payments. Possibility of lower interest rates. An option to shorten the term of your loan to pay off your home faster. Reduce expensive mortgage insurance premiums. Stabilize your payments by switching from an ARM to a fixed-rate loan.
Cons
You will pay closing costs of approximately 2% to 6% of the loan amount. You must continue to live in your home long enough to cover the costs of refinancing. Restarting the loan term increases the total amount of interest paid over the loan term. Cashout refi.
Mortgage refinancing trends
Mortgage rates hit record lows below 3% after the Fed intervened and lowered the federal funds rate to keep the economy afloat during the 2020 and 2021 COVID-19 pandemic I felt depressed. This has led millions of homeowners to refinance. In fact, more than 50% of outstanding mortgages have interest rates of 4% or less, and more than 75% have interest rates of 5% or less, according to Realtor.com in June 2024.
After 2022, inflation spiked as the pandemic recovery took hold, and the Fed raised the federal funds rate 11 times between March 2022 and July 2023. Mortgage interest rates also rose, hovering between 6% and 7% for nearly two years. , refinancing activity is at an all-time low.
That is, until recently.
The average 30-year fixed mortgage rate as of Aug. 22 was 6.46%, down 77 basis points from 6.98% a year ago, according to Freddie Mac. With the Federal Reserve signaling its intention to cut interest rates in September, expectations are that mortgage rates will follow suit, potentially leading to a surge in new refinance activity.
Learn more: Mortgage rate projections — If the Fed cuts rates, how low could they fall in 2024 and 2025?
Mortgage rates (including refinance rates) are generally considered to be closely tied to the 10-year Treasury index, says Freeman of Embrace Home Loans. If the 10-year Treasury falls to 3.25% and the spread is 2.5%, the 30-year fixed rate could fall to 5.75%.
And if the 10-year rate drops to 3.25% and the spread goes to 2.25%, the 30-year fixed rate could drop even further to 5.5%, Freeman said.
“Of course, there is no such thing as a crystal ball, and mortgage rates, like everything else, will depend on the economic conditions of different demographics and the Fed's decisions,” he added.
Read more: Should 30-year terms be replaced with 40-year mortgages as the American norm?
Take-out
Refinancing your mortgage can be a smart move to help you reach certain financial goals, but you'll need to pay closing costs and other considerations. To get the best refi rate possible, make sure your credit and finances are in good standing so you can strike quickly when interest rates drop. An experienced loan officer or mortgage broker can help you evaluate refinancing options, costs, potential savings, and other factors to determine whether now is the right time to refinance.
FAQ
Can I refinance multiple times?
You can refinance your mortgage multiple times, but each time you refinance, you'll have to pay closing costs and may incur prepayment penalties.
What factors affect mortgage refinance rates?
Mortgage refinance rates, like mortgage rates, change daily and even hourly based on mortgage market conditions, inflation, unemployment, Federal Reserve monetary policy, and your specific financial and credit profile. I will.
Can I fix the interest rate on my mortgage refinance?
Locking in your mortgage refinance rate will protect you from incurring additional payments if interest rates rise before your new loan closes. However, be aware that some lenders charge a rate lock fee for this benefit, increasing your overall borrowing costs.
How long does it take to refinance a mortgage?
Mortgage refinances typically take 30 to 45 days, but this schedule varies depending on the lender, loan program, application complexity, and borrower volume.
