Refinancing can be a great move if you can get a lower mortgage rate or pay off your home loan in less time. By refinancing your home loan, you’ll be replacing your current mortgage with a new one that has a different loan amount and interest rate.
With refinance rates still relatively high, homeowners are less likely to find a lower rate than the one on their current mortgage.
Refinancing could still make sense in an elevated-rate environment, but it all depends on your financial situation and what you plan to do with the cash.
Current refinance interest rates and trends
During the pandemic, millions of homeowners refinanced their mortgages to take advantage of historically low rates, which were around 3%. In 2022, mortgage rates surged as the Federal Reserve began hiking interest rates to tame inflation.
In 2024, mortgage rates are still high, around 7%. Since the majority of homeowners today have mortgage rates below 5%, refinancing won’t save them money right now.
Homeowners who may have opted for a cash-out refinance to secure a cheaper mortgage rate have instead kept their existing mortgages and turned to home equity loans and home equity lines of credit as a way to get cash out of their properties.
Mortgage rates could fall into the mid-6% range by the end of the year. That will depend on how quickly inflation decelerates and when the Fed starts lowering interest rates. The central bank has kept interest rates steady since last summer.
If you purchased a home when rates were close to 8% last fall, refinancing to a rate under 7% could help you save on your monthly mortgage payments, but you’d have to factor in closing fees.
What is refinancing?
When you refinance your mortgage, you pay off your existing mortgage with a new home loan that comes with new rates and terms. If you secured your existing mortgage when interest rates were higher than they are today, refinancing at a lower rate can save you money on your monthly payment or allow you to pay off the loan faster (and sometimes both).
Reasons to consider refinancing
There are many good reasons to refinance when conditions are right. Some of the most common scenarios include:
Reduce your monthly payments
Switching to a new loan with a lower interest rate or longer repayment term can reduce your monthly mortgage payment. The amount you’ll save each month depends on the size of your mortgage and how much lower the new interest rate is compared to your previous loan. Most experts recommend refinancing if you can reduce your interest rate by 0.75%.
Pay off your mortgage sooner
If your original mortgage was a 30-year loan, you could refinance to pay it off sooner. With a lower interest rate, you may be able to switch to a 15-year loan and still have a manageable monthly payment. Reducing the length of the mortgage also lowers the total amount of interest you’ll pay over the life of the loan.
Getting cash out of your home
With a cash-out refinance, you apply for a new loan that’s larger than what you owe on your old loan -- and take the difference as a cash payment. Many homeowners use a cash-out refinance to pay for home improvements.
Switch to a fixed-rate loan
If you have an adjustable-rate mortgage, switching to a fixed-rate loan could be a good move. Refinancing can help you reduce future risk, according to Jason Fink, a professor of finance at James Madison University in Harrisonburg, Virginia. Locking in a fixed-rate mortgage provides predictability and protection from future rate increases.
Eliminate private mortgage insurance
Most loans require private mortgage insurance if you put less than 20% down when buying a home. As home prices have increased, you may have crossed the 20% equity threshold, creating an opportunity for you to refinance without PMI. (You can also ask your current lender to eliminate the PMI without refinancing.)
Reasons to not refinance
Fees are too high
While refinancing can save money in the long run, you’ll need to pay upfront closing costs that can add up to thousands of dollars.
Interest rates are higher
If the interest rates have increased and your repayment term is the same, your payments will increase and you won’t save money.
You’re planning on moving soon
It could take a few years to recoup your refinance fees. If you expect to move in a few years, the trouble and expense of refinancing now might not make sense.
You’re nearly finished paying off your mortgage
Mortgages are designed so that your highest interest payments come during the early years. The longer you’ve had the mortgage, the more your monthly payment goes to paying off the principal. If you refinance later in the loan term, you’ll revert to primarily paying interest instead of building equity.
Different types of refinancing
There are a few different options for refinancing a mortgage. Here’s a breakdown of some of the different ways to replace your current home loan:
Rate-and-term refinance
A rate-and-term refinance replaces your mortgage with a new rate and/or term with one of two goals: save money or pay off the loan faster. For example, you might decide to refinance a 30-year mortgage with a 7.5% interest rate with a new 30-year mortgage with a 6.5% interest rate to reduce your interest charges. Or you might have 20 years left on a 30-year mortgage and opt to refinance to a 15-year mortgage -- ideally with a lower interest rate -- to accelerate your payoff timeline.
Cash-out refinance
A cash-out refinance replaces your existing mortgage with a new loan that’s worth more than your current loan. The goal with a cash-out refinance is to tap into your home equity and borrow cash at a lower rate to cover a major expense such as remodeling your kitchen or paying for college.
FHA or VA streamline refinance
If you have a mortgage backed by the FHA or the VA, you may be able to qualify for a streamlined refinance. This “streamlines” the process by eliminating some of the additional paperwork involved, including a new home appraisal or proof of income documentation. VA streamline refinances are commonly known as a VA IRRRL, or Interest Rate Reduction Refinance Loan.
How to get the best refi rate
Getting the lowest refinance rate available is similar to getting the lowest rate possible on a new purchase loan: It starts with your personal finances. Evaluate your credit report at least 30 days before you apply for a refinance. If there is any incorrect information, dispute it. Creditors have 30 days to confirm the accuracy of the information or remove it from your report. Removing inaccurate information can improve your credit score and possibly help you qualify for a lower interest rate.
Taking steps to improve your credit, including paying off credit cards, can lower the risk associated with your new loan. It’s also important to compare options from multiple lenders. In addition to scoring the lowest rate, shopping around can help you find options with lower fees to help save on your closing costs.
Current mortgage and refinance rates
| Product | Interest rate | APR |
|---|---|---|
| 5/1 ARM | 6.46% | 7.71% |
| 30-year fixed-rate VA | 7.07% | 7.11% |
| 7/1 ARM | 6.63% | 7.75% |
| 15-year fixed-rate | 6.53% | 6.61% |
| 20-year fixed-rate | 6.89% | 6.95% |
| 5/1 ARM jumbo | 6.45% | 7.63% |
| 10/1 ARM | 7.02% | 7.84% |
| 30-year fixed-rate FHA | 6.97% | 7.02% |
| 7/1 ARM jumbo | 6.63% | 7.61% |
| 30-year fixed-rate | 7.06% | 7.11% |
| 15-year fixed-rate jumbo | 6.68% | 6.76% |
| 30-year fixed-rate jumbo | 7.09% | 7.15% |
| 5/1 ARM refinance | 6.45% | 7.67% |
| 10/1 ARM refinance | 7.05% | 7.83% |
| 30-year fixed-rate VA refinance | 7.63% | 7.66% |
| 5/1 ARM jumbo refinance | 6.39% | 7.59% |
| 7/1 ARM refinance | 6.69% | 7.68% |
| 15-year fixed-rate refinance | 6.55% | 6.63% |
| 30-year fixed-rate jumbo refinance | 7.15% | 7.20% |
| 20-year fixed-rate refinance | 6.89% | 6.94% |
| 30-year fixed-rate FHA refinance | 6.95% | 6.99% |
| 7/1 ARM jumbo refinance | 6.63% | 7.61% |
| 30-year fixed-rate refinance | 7.08% | 7.13% |
| 15-year fixed-rate jumbo refinance | 6.74% | 6.82% |
How to apply to refinance my home loan
1. Get your credit in great shape: While conventional lenders will approve refinance applications with a credit score of 620 or higher, the best rates go to borrowers with scores of 740 or higher.
2. Figure out how much home equity you have: How much is your house worth? And how much money do you still owe on your current mortgage? The difference is your home equity. Simply put, the higher your equity, the better you’ll look in the eyes of a lender.
3. Compare multiple offers: You don’t have to refinance your mortgage with your current lender -- although it’s worth starting with them to see what they can offer. Some lenders will waive certain fees for current borrowers who want to refinance. Make sure you compare other options. Comparison shopping is the key to saving money, whether you’re shopping for groceries or a new mortgage.
4. Lock your rate: Rates have increased substantially since the Federal Reserve started hiking interest rates, so it’s important to lock in a rate once you find one that suits your needs. If you don’t, you could wind up paying more. Make sure you ask about a float-down rate lock, which lets you take advantage of lower interest rates if they become available.
5. Communicate: Once you settle on a lender, it’s important to be responsive to requests for financial documentation. The faster you respond, the faster you’ll be able to close on the new loan, and the faster you’ll be able to start saving money with your lower rate.
FAQs
There may be a slight difference between average refinance rates and average rates for purchase loans (the initial mortgage taken out on the home). The bigger difference between buying a new home and refinancing your current mortgage tends to be with the closing costs. The closing costs for refinances are lower, averaging less than 1% of the total loan amount. There are some exceptions in New York, Pennsylvania and Delaware, where closing costs are significantly higher.
Refinancing involves paying closing costs, although the costs tend to be lower than with a new purchase loan. You should expect to pay 2% to 5% of the total mortgage value depending on the size of the loan, although you may be able to roll closing costs into your loan balance. In 2021, the average closing costs to refinance a mortgage for a single-family home added up to $2,375, according to data from ClosingCorp. That figure doesn’t include any local taxes, which can add thousands in certain parts of the country.
To figure out if refinancing makes financial sense, you need to determine your break-even point, i.e., when your projected savings are greater than the costs associated with refinancing the loan. This ultimately comes down to how long you plan to live in the home. For example, if you’re going to pay $6,000 to refinance your mortgage for a lower rate, you’ll need to determine if you’ll be in the home long enough for the total monthly savings to add up to more than $6,000.
