Mortgage refinancing involves replacing your existing mortgage with a new mortgage on the same property. The funds from your new mortgage are used to pay off your existing loan, and payments on your new mortgage begin in its place.
There are many reasons to refinance your mortgage. You may want to lower your interest rate, lower your monthly mortgage payments, avoid paying mortgage insurance premiums, or borrow from the equity you've built in your property.
Here's when you should consider refinancing and how to make it happen.
Let’s dig deeper: Is now a good time to refinance your mortgage?
Refinancing can help you achieve many goals. Here are five times when it might be a good idea to refinance your mortgage.
If your current mortgage rate is lower than the rate on your existing mortgage, you may be able to save money by refinancing to a lower rate. Your monthly payments may also be lower.
Mortgage interest rates are lower than this time last year. It fell in August and early September, but has been on a gradual upward trend in recent months. Rates will probably fall in 2025, but the change may be gradual.
The free Yahoo Finance mortgage calculator can help you estimate how much of your monthly payment will be applied to principal and interest at a lower interest rate. You can also use a refinance calculator to determine if refinancing is right for you. This requires calculating your break-even point, or the time it takes for refinancing to save more than it costs.
Learn more: 5 Strategies to Get the Lowest Mortgage Rates
A fixed rate protects you from interest rate fluctuations that can cause higher payments on an adjustable rate mortgage. Adjustable rates allow you to keep your payments low for an initial set period, but then your payments can increase if the rate increases.
However, if the Fed lowers its target range for the federal funds rate after its September and November 2024 meetings, the adjustable rate should also drop, making ARMs worth considering for some homeowners. .
Let's wait and see if the Fed continues to cut rates at its December meeting and throughout 2025.
Learn more: Adjustable rate vs. fixed rate mortgage: which one should you choose?
If you have a shorter term, such as 15 years instead of 30, your payments are usually higher, but you pay less interest over the life of the loan. A longer term, such as 30 years instead of 15, typically means lower payments, but you'll probably pay more interest over the life of the loan.
Some types of loans allow the borrower to cancel private mortgage insurance (PMI) if there is sufficient equity in the home. If your loan does not allow you to cancel your mortgage insurance at any equity level, you will need to refinance into a new loan to stop that payment.
If there is a change in personal or family circumstances, such as divorce or inheritance between co-owners, refinancing may be necessary to update who is responsible for repaying the loan.
Read more: Pros and cons of refinancing your mortgage
You may not want to refinance if you plan to sell your home within the next few years. In that case, the benefits of refinancing may not outweigh the costs and time it takes to complete the refinance process.
Read more: 9 options for refinancing your bad credit mortgage
There are seven different mortgage refinance options you can consider. The right choice will depend on your goals, budget, amount of home equity, and other factors. There are three loan options:
1. Refinance interest rate and term
An interest rate and term refinance occurs when the new loan amount is equal to the outstanding balance of the current loan. Interest rates, repayment terms, or other aspects of your loan may change. You can also change your current financial institution to a new one.
Streamlining refinancing is done by replacing your current loan with a new loan of the same type, simplifying paperwork and documentation requirements.
There are three types of loans that can be efficiently refinanced: FHA loans guaranteed by the Federal Housing Administration (FHA), VA loans guaranteed by the U.S. Department of Veterans Affairs (VA), and USDA loans guaranteed by the U.S. Department of Veterans Affairs (VA). . Agriculture (USDA).
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A cash-out refinance loan is when the new loan amount is significantly greater than the current loan balance, and the difference is paid in cash. This type of refinance reduces the equity in your home, but you can use the cash to pay for home improvements or other expenses.
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A cash-in refinance is essentially the opposite of a cash-out refinance. Instead of taking out a larger mortgage and receiving cash, you can refinance by putting more money into your down payment and taking out a smaller mortgage. This results in lower monthly payments and less interest paid over the life of the loan.
As the name suggests, a no-closing-cost refinance means you don't have to pay any fees at closing. However, lenders will typically recover that money from you in one of two ways. This means they either roll the closing costs into the principal of the mortgage, or they cover the closing costs and charge a higher interest rate in return.
If you are behind on your mortgage, meaning you owe more on your loan than your home is currently worth, a short-term refinance may be an option. This type of refinance replaces your current mortgage with a mortgage that costs less than what you owe. Your monthly payments will be lower and you can continue living in your home. Some lenders will agree to a short-term refinance, even if it's not ideal, because it may be more financially advantageous than going through the foreclosure process.
Read more: What to do if you have a flooded mortgage
Although a reverse mortgage is not technically a type of refinancing, there are some similarities. Similar to cash-out refinancing, reverse mortgages leverage your home equity. Instead of paying the lender to repay the loan, you will receive money, increasing your debt. Reverse mortgages are an option for seniors to increase their retirement funds.
Refinancing isn't free. Like first loans, these loans have closing costs, such as appraisal fees, loan origination fees, title search fees, and insurance costs.
One of the fees you may incur when refinancing is options. This is called “buydown” or “discount points,” and is a strategy for lowering your refinance interest rate. If you choose to pay, you will receive a lower mortgage rate for the first term of your new loan.
Some borrowers choose to pay these upfront costs in cash. Some people prefer to roll costs into their loans through higher loan amounts or higher interest rates. Which option you choose depends on your personal financial situation and the amount of cash you have available.
Learn more: How often can (and should) you refinance your home?
Regardless of your reason for refinancing, you should research and consider your lender carefully. Fill out loan applications from multiple refinance lenders and compare quotes to find the lowest interest rate available. The refinance interest rates and fees you are quoted will depend on factors such as your income, credit score, loan term, desired loan type, desired loan amount, and the current value of your home. Keep in mind that eligibility and underwriting requirements also vary from lender to lender.
Read more: How soon after purchasing a home can I refinance my mortgage?
Refinancing your mortgage means replacing your original mortgage with a new mortgage, which may have different terms and interest rates. Then, use the funds from your new mortgage to pay off your old mortgage.
If refinancing your mortgage can help you financially, it may be a good idea. For example, if you can lower your mortgage interest rate by refinancing, you'll save money on your monthly payments and pay less interest in the long run. But if you plan on moving soon, refinancing is usually not a good idea. That's because the amount you save likely won't cover the amount you paid up front in closing costs.
If you are in a difficult financial situation, refinancing your mortgage may be difficult as you may not be able to get the terms you want. Otherwise, refinancing isn't necessarily more difficult than taking out your original mortgage. Lenders require certain credit scores, loan-to-value ratios (LTV), and debt-to-income ratios (DTI), which vary by company and loan program.
Refinancing your mortgage can initially damage your credit, as it requires a hard credit check and may even increase your debt. However, such problems are usually temporary, and if you make your payments on time each month, your credit score should improve over time.
Refinancing typically takes about four to six weeks, depending on the mortgage lender. As of November 2024, the average refinance completion time was 41 days, according to ICE Mortgage Technology.
