What Is Mortgage Refinancing?

If you bought a home with a purchase loan, you could save money by refinancing to get better rates and terms. Mortgage refinancing involves taking out a new loan to pay off your existing mortgage. Homeowners refinance their mortgage for a few reasons:

• To take advantage of lower market interest rates
• To cash out a portion of their home equity
• To reduce monthly payments on an existing mortgage by extending the repayment period
• To save money on interest by reducing the repayment period
• To convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice-versa
• To consolidate debt

Types of Mortgage Refinancing

You may have taken out a mortgage many years ago. The mortgage you took out then may not be suitable for your situation today. During the process of refinancing, homeowners can customize the terms of a new loan. They can adjust the loan length in years, the amount borrowed, and negotiate a new rate. Interested in seeing if refinancing makes sense for you? Let’s take a look at the different types of mortgage refinancing options available.

Rate-and-Term Refinance

This type of mortgage refinance involves renegotiating the loan rate, term, or both. It’s the most common refinance, especially in a falling mortgage rate environment.

Rate-and-term refinance explained: Let’s say, a homeowner has a 30-year fixed rate mortgage. With a refinance, you could adjust your loan to a 15-year fixed rate mortgage to pay off the debt sooner. You may also want to adjust your rate if the market has improved and interest rates have gone down. For example, if the original mortgage has a 6% mortgage rate, you could negotiate down to a 4% rate.

Cash-Out Refinance

In a cash out refinance, homeowners seek to increase the total borrowed amount, typically at least 5% or more of the original loan amount. The additional funds can be used for various purposes, such as home improvements, consolidating debt into a single loan, or other expenses

Cash out refinance explained: With this type of cash out mortgage, the borrower only owes the original amount to the bank and pays the additional borrowed amount in cash at closing. Lenders normally cap the amount of a cash-out refinance mortgage at 80% of your home value. To qualify for a home equity cash out, homeowners usually need a higher credit score and low loan-to-value ratio (LTV).

No-Cost Refinance

A no-cost refinance avoids paying closing costs when taking out a new mortgage loan. Instead of paying closing costs upfront, it moves closing costs to the principal (the total amount of money borrowed). The lender may also waive closing cost fees in exchange for a higher interest rate.

No-cost refinance explained: Closing costs typically range between 3% to 6%. Commonly, lenders will roll the refinance closing costs into the principal amount borrowed. This increases payments each month, but does not affect your interest rate. Otherwise, you can negotiate a higher interest instead of paying closing cost fees.

For example, if you took out an original loan for $150,000 at 6.5% interest over a 15-year term. You’d end up paying $85,199 in interest over the lifetime of your loan. If you had closing costs of $6,000, or 4%, you’d have to pay for interest plus closing costs, totalling $91,199.

If you negotiate to waive closing costs, your lender may increase your interest rate. If the interest rate is 7.1%. you’d end up paying $94,196 in total. This means that you’d pay nearly $3,000 more for your loan. So, you would save on closing costs upfront but would end up paying more in the long run.

You could choose to roll the closing costs of your new loan into the principle. If closing costs equal $6,000 for a $150,000 refinance loan, your principle increases to $156,000. If you have a 15-year loan, your monthly payment would increase about $52 per month, from $1,307 to $1,359. You’d also pay $3,408 more in interest over the life of the loan. It helps to check your monthly budget to decide if this option works for you.

Mortgage Refinance Rates

The process of refinancing a mortgage is similar to taking out an initial mortgage. Begin by comaprig rates of various lenders.

Factors Influencing Refinance Rates:

• Current market conditions
• Credit score
• Debt-to-income ratio
• Loan-to-value (LTV) ratio
• Type of refinance loan

If the market has improved, you may qualify for lower interest rates than your existing mortgage. Also, if your credit has improved since you signed your mortgage, you may qualify for lower rates and more favorable terms.

Mortgage refinance rates also depend on your financial health. Lenders look at factors such as your credit score, debt-to-income ratio, and the loan-to-value (LTV) ratio. The better your financial situation, the better rates you’ll get on your loan. So, it may make sense to improve your current credit or pay off debt before refinancing in order to get the best home refinance rates today.

Keep in mind that you may need to pay for closing costs on a new mortgage. Refinancing can cost between 3% and 6% of the loan's principal and requires an appraisal, title search, and application fees. You may need to pay as much as $5,000 upfront when securing a loan from a new lender. Your lender may also charge prepayment penalties for paying off your current mortgage early.

Fixed vs. Adjustable-Rate Mortgages for Refinance

Just like a standard purchase mortgage, refinance mortgages come with either fixed or adjustable rates. Each comes with their own advantages and disadvantages, worth considering before securing a new loan.

Fixed-Rate Refinance Rates: Interest rates remain the same throughout the duration of the loan, making this ideal for predictable mortgage payments. If you have less risk tolerance, you may prefer the certainty of a fixed-rate loan. However, refinance mortgage rates tend to run higher than an adjustable rate mortgage.

Adjustable-Rate Refinance Rates: Adjustable-rate refinance rates fluctuate periodically based on the changing market conditions. Rates can be favorable in the right market, but may go up or down, making monthly payments unpredictable.

Current Refinance Rates

Refinance rates today vary due to a number of different factors, including your credit score, debt-to-income (DTI) ratio, state of residence, and current market conditions.

For example, in 2024, current 30 year refinance rates in California are 6.030%, 5.178% for a 15-year fixed, and 7.503% for a 5-year adjustable-rate mortgage (ARM). Rates can change, so make sure to check the market periodically to find out current refinance rates.

To find the best home refinance rates today, visit an online marketplace to compare offers from different lenders. This can help shop around and secure the best refinance rates based on your situation.

VA Loan Refinancing

Active military members and veterans qualify for U.S. Department of Veterans Affairs (VA) loans. VA loans come with substantial advantages such as a lower down payment, flexible terms, and easier eligibility. Veterans looking to secure better terms through refinancing their current VA loan have two options: Interest Rate Reduction Refinance Loan (IRRRL) or a VA cash-out refinance.

VA Refinance Options

Interest Rate Reduction Refinance Loan (IRRRL): Also known as a VA streamline refinance, this simplified option makes sense if you already have a VA loan and want to save money with a lower rate. A VA IRRRL also applies if you’d like to change from an adjustable-rate VA loan to a fixed-rate. You can only qualify if current VA IRRRL rates are lower than your VA loan.

VA Cash-Out Refinance: This VA refinancing option enables borrowers to take out more than the current balance on their mortgage to access cash. Qualified veterans and active duty members can take out additional home equity on a VA or conventional loan.

Who Qualifies for VA Loan Refinancing?

Eligible American veterans or their surviving spouses (provided they do not remarry) may qualify for VA loan refinancing.

Those eligible for a VA home loan include:

• Active duty service members
• Veterans
• Certain members of the National Guard and Reserves
• Surviving spouses of service members who died in the line of duty or as a result of a service-related disability
• Eligibility is based on service length and duty status
• A minimum credit score of 620

Benefits of VA Refinance

A VA refinance can help those who qualify save money in the long run on their mortgage. If the market has improved since you first took out your loan, you could refinance and get lower interest VA IRRRL rates.

If you’ve built up equity on your home, a cash-out refinance makes sense if you’d like to borrow some extra cash for expenses. In addition, you could refinance on a conventional loan and stop paying private mortgage insurance (PMI), as VA loans do not require PMI.

How Much Equity Do I Need to Refinance?

Home equity refers to the difference between your mortgage value and the value of your home, or the loan-to-value ratio (LTV). Lenders use your LTV to assess risk, and a relatively low LTV could help you qualify for lower interest rates.

Lenders require an appraisal to assess your current home value. For conventional home refinancing, typically, your home value should exceed the amount you owe. If you’d like to refinance to stop paying monthly PMI, you should have home equity of at least 20% your home value.

Even if you owe more than the value of your home, you may still have refinancing options. Programs like the Freddie Mac Enhanced Relief Refinance or the Fannie Mae High Loan-to-Value Refinance program could help those that owe more than 97% of the value of their homes.

Has your home value increased since you took out your initial mortgage? If the value of your home has gone up, it can reduce your LTV ratio. Refinancing could help get better interest rates and terms on your current home loan. This could save you money during the lifetime of your loan and reduce monthly payments. If your home equity has increased enough, you can complete a cash-out refinance and gain access to extra cash.

Costs of Refinancing

Closing Costs: Refinancing your mortgage could save you money long term, but you may have to pay initial closing costs. The process could cost anywhere between 2% to 6% of your new loan. These costs could include appraisal fees, title insurance, and origination fees.

No-Closing Cost Options: Some lenders offer no-cost refinancing. But, despite the name, this loan isn’t free. Rather lenders roll closing costs in the principal amount. So, instead of paying closing costs upfront, it may cost you more in interest over the duration of the loan.

How to Compare Costs

Comparing refinancing offers can help find the best terms on your loan. At online lending marketplaces, you can instantly compare current refinance rates from trusted lenders and see how much you can save. Start by comparing the total five-year cost of different loans. You can then adjust loan terms to find the best rates based on your budget.

How to Choose the Right Lender for Refinancing

Ready to take the next steps to securing better rates and terms on your mortgage? It all comes down to choosing the right lender. Follow these guidelines to help make the most of refinancing your home loan:

Consider Your Financial Goals: What do you hope to achieve in refinancing your mortgage? Lower monthly payments? Better terms on your loan? Perhaps you’d like to access accrued equity to pay for other expenses. Understanding the purpose of refinancing can help you choose the right lender and loan type.

Compare Rates and Terms: Before choosing your loan, make sure to compare loan offers to get the best refinancing terms. Our site makes it easy to shop around to find rates and terms from different lenders.

Look at Fees and Costs: If you want to save the most money on refinancing, make sure to compare closing costs and other associated fees. Even loans that offer “no-closing costs” aren’t free and roll those fees into total principal. So get clear on all refinance rates and terms, including fees and costs. This gives you a true understanding of what you’ll pay monthly and overall throughout the lifetime of your loan after refinancing.

Digital vs. Traditional Lenders: The internet has made the lending process easier than ever. In the past, traditional lenders required in-person interactions. It would take much longer to hard-check any financial documents and complete the approval process.

Today, digital lenders streamline refinance, making it faster and easier than ever to secure a new loan. Prospective borrowers can explore mortgage refinance rates, submit their application, and receive approval within minutes using digital lenders. The time it takes to get approved varies, depending on the lender.

How to Apply for a Mortgage Refinance

Initially, when shopping around for mortgage refinancing options, you may only need to provide a few personal and financial details such as the type of home you currently own, the location of the home, and details about your current mortgage. Once you apply, you may need to provide documentation of your current mortgage and additional information about your finances.

Timeline for Refinance Approval

It typically takes 30-45 days for refinance approval, but can vary based on the lender. Receiving prequalification and preapproval could help speed up the refinancing process.

Prequalification gives a ballpark idea of the refinancing loan terms you can expect. But, this information relies on what the borrower provides the lender. It’s just an estimate, rather than an approval.

Preapproval gives a more concrete understanding of the terms on your new loan. It is a lender's commitment to refinancing terms. During this stage, the lender will run a hard credit check and validate your financial information to get a more accurate assessment of your loan terms. Lenders will also send an underwriter to get a current appraisal on your home to find out its value.

Common documents needed to refinance include:

• Identification
• Bank statements
• Tax returns
• Income verification
• Credit report
• Assets report
• Pay stubs

Streamline Process for VA/FHA: Mortgage loans backed by the government could make the refinancing process simpler and easier. Active military members and veterans could qualify for benefits such as a lower down payment, flexible terms, and easier eligibility by refinancing VA loans from the U.S. Department of Veterans Affairs.

If you took out a Federal Housing Administration mortgage, or FHA home loan, you could also qualify for refinancing. FHA loans typically have less strict requirements, like lower credit eligibility. You could still qualify for better loan terms even with a lower credit score or higher debt-to-income ratio than in a conventional refinance.

FAQs About Mortgage Refinancing

Have questions about mortgage refinancing? Online mortgage lending services can help you secure better rates on an existing mortgage through refinancing. Before choosing a mortgage refinancing option, make sure to understand the process. Get started with these answers to the most common questions about mortgage refinancing.

Do I need good credit to refinance?

Having good credit can help qualify for better terms on your loan, saving you money in the long run. Lenders usually look for a credit score of at least 620 for a conventional refinance. VA loan and FHA loan refinance have less strict credit requirements of at least 580. It can help to build a better credit score before refinancing, through things like paying off debt, making minimum payments, and paying bills on time.

How much does it cost to refinance?

The cost to refinance depends on factors such as your financial situation, home value, credit score, and current market conditions. You can expect to pay anything between 2% to 6% of the amount of the new loan.

Some common refinancing fees include:

• Application fee: $75 to $500
• Origination fee: Up to 1.5% of loan amount
• Credit report fee: $30 to $50
• Home appraisal: $300 to $400
• Home inspection: $300 to $500
• Flood certification fee: $15 to $25
• Title search and insurance fee: $400 to $900
• Recording fee: $25 to $250
• Reconveyance fee: $50 to $65

Can I refinance if my home value has decreased?

Lenders look for a relatively low loan-to-value (LTV) ratio. If the value of your home has decreased, this could likely affect your LTV and may make it more difficult to get better terms on your new loan.

Is it better to go for a shorter loan term when refinancing?

The length of time you have to repay your loan, or loan term, affects your monthly payments. If you increase your monthly payments, and shorten your loan term, you could save money on interest—that is, if you can afford it. It may make more sense to pay less each month if your budget simply can’t cover higher monthly costs.

Lenders commonly offer 15 and 30 year loan terms. Let’s say you qualify for refinance rates 30 year fixed of 3.5% on a $200,000 mortgage, you would pay approximately $123,000 in interest over the life of the loan. If you cut your term in half to 15 years through refinancing, you would pay about $57,000 in interest over the course of the loan. But, you would also increase your monthly payments.

Do I have to refinance with my original lender?

No, you don’t need to refinance with your original lender. In fact, you may get better terms and rates by switching lenders. Shop around and compare refinance loan offers to find the best home refinance rates today based on your situation.

Conclusion

Paying too much in payments and interest rates on your mortgage each month? You may want to consider refinancing. With mortgage refinancing, you could reduce your monthly payments, pay off your loan faster, or qualify for cash from home equity.

For the best rates on your new loan, compare top refinancing lenders. Our chart provides easy comparisons, helping you get the right offer for your needs.