Millions of homeowners are in position to benefit from a refinance, so it’s worth considering whether you could be one of them. To figure out if a refinance makes sense, you’ll want to consider things like upfront fees, loan type, and length of the loan.
Here’s what you need to know about how to determine if refinancing is the right move for you and how to secure the best possible rate.
What the Experts Are Saying About Refinance Rates
Mortgage interest rates have inched above their all-time low point this year, after the average 30-year rate hit 2.65% in early January, according to industry benchmark data from Freddie Mac. Even with the slight rise, they’ve remained around 3% throughout this year — still historically low.
However, the general consensus among experts is that rates will climb by the end of 2021. The main question is how far and how fast will they rise? “I haven’t forecasted rates to go above 3.625% this year. I still believe that to be the case,” says Logan Mohtashami, lead analyst at HousingWire, a mortgage and housing market news outlet.
Even with mortgage rates expected to increase in the coming months, homeowners who haven’t refinanced recently can still secure significant savings. Mortgage rates have hovered between 4% and 5% for most of the past eight years. Cutting your mortgage rate by 1% or 2% could reduce your monthly payment by hundreds of dollars and save you thousands of dollars in interest over the life of the loan.
Although the overall trend for the rest of this year and into 2022 is higher interest rates, it looks like rates will increase in fits and spurts over time, not overnight. That means the window to refinance remains open.
What the November 2021 Refinance Rate Forecast Means for You
This is great news for homeowners because the low rates give you more options when it comes to refinancing your existing home loan. Borrowers who haven’t refinanced in the past two years could secure significant savings with a rate and term refinance.
Let’s look at a borrower who took out a home loan three years ago for $318,000 with a 30-year repayment term at 4.25%. In that scenario, the homeowner would be refinancing a mortgage balance of roughly $300,000. Here’s what that would look like with a rate reduction of 1% or more.
|Loan Term||Interest Rate||Monthly Mortgage & Interest Payment||Total Interest Remaining|
|30 Years (27 years remaining)||4.25||$1,573||$207,703|
Lowering your interest rate, and reducing or extending your loan’s repayment term aren’t the only reason a refinance could make sense for you. A homeowner may want to complete a cash-out refinance where you borrow against your home’s equity by taking out a loan for more than your current loan balance and get the difference back in cash. With home values rising, cash-out refinance loans are growing in popularity. More cash-out loans were closed in the second quarter of 2021 than at any time since 2007, according to data analytics firm Black Knight. This allows homeowners to consolidate high-interest debt or to affordably finance home improvements.
Normally, a cash-out refinance will significantly increase your monthly payment because you are taking out a larger loan. But, with rates so low — and property values so high — this could be an affordable way to finance home upgrades or to consolidate higher interest debt, such as credit card balances.
What Are Today’s Refinance Rates?
On Sunday, December 05, 2021 according to Bankrate’s latest survey of the nation’s largest mortgage lenders, the average 30-year fixed mortgage refinance rate is 3.130% with an APR of 3.250%. The average 15-year fixed mortgage refinance rate is 2.440% with an APR of 2.600%. The average 5/1 adjustable-rate mortgage (ARM) refinance rate is 2.690% with an APR of 3.980%.
Current Mortgage and Refinance Rates
|30-Year Fixed Rate||3.130%||3.250%|
|30-Year FHA Rate||2.700%||3.580%|
|30-Year VA Rate||2.790%||2.990%|
|30-Year Fixed Jumbo Rate||3.120%||3.190%|
|20-Year Fixed Rate||3.010%||3.130%|
|15-Year Fixed Rate||2.440%||2.600%|
|15-Year Fixed Jumbo Rate||2.430%||2.490%|
|5/1 ARM Rate||2.690%||3.980%|
|5/1 ARM Jumbo Rate||2.680%||3.690%|
|7/1 ARM Rate||2.880%||4.000%|
|7/1 ARM Jumbo Rate||2.890%||3.920%|
|10/1 ARM Rate||3.090%||4.080%|
|30-Year Fixed Rate||3.140%||3.300%|
|30-Year FHA Rate||2.660%||3.530%|
|30-Year VA Rate||2.750%||2.920%|
|30-Year Fixed Jumbo Rate||3.130%||3.220%|
|20-Year Fixed Rate||3.020%||3.170%|
|15-Year Fixed Rate||2.440%||2.670%|
|15-Year Fixed Jumbo Rate||2.430%||2.500%|
|5/1 ARM Rate||2.760%||4.070%|
|5/1 ARM Jumbo Rate||2.810%||4.050%|
|7/1 ARM Rate||2.870%||3.980%|
|7/1 ARM Jumbo Rate||3.000%||4.010%|
|10/1 ARM Rate||3.090%||4.040%|
Rates as of Sunday, December 05, 2021
ABOUT THESE RATES
These rate averages are based on weekday mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures. These averages provide borrowers a broad view of average rates that can inform borrowers when comparing lender offers. These average rates are updated daily, though it is possible rates have changed since this was last updated.
How to Use Our Mortgage Refinance Rate Table
On our refinance and mortgage rate table you can find average interest rates for a variety of the most popular types of home loans. We feature both the interest rate and the annual percentage rate (APR), which includes additional lender fees, so you can get a better idea of the overall cost of the loan. You’ll find information for specific types of loans, such as VA loans, FHA loans, jumbo loans, and adjustable rate mortgages (ARM). It also includes loans with different repayment terms, 15-year, 20-year, and 30-year refinance loans.
The actual interest rate you can qualify for is likely to be different from the average rates quoted in our rate table. But these rates are useful for giving you a benchmark to use when comparing loan offers. These rates can give you a sense of how the type of mortgage and the length of the repayment term impacts your interest rate and APR. A shorter loan repayment term typically comes with a lower interest rate compared to a similar loan with a longer repayment period. Government-backed loans, such as VA and FHA loans, are easier to qualify for with a lower credit score, but can have higher fees than conventional loans.
How Mortgage Refinance Rates Work
Your refinance rate is the interest rate you’ll pay on the money you’re borrowing. The total dollar amount you’ll pay in interest charges will vary not only with your interest rate, but also depending on the size of your loan and the length of your repayment term.
Your mortgage’s amortization schedule will show exactly how much of each monthly payment is paying off the loan principal and how much goes to paying interest. You can get a good estimate of your payments using the NextAdvisor amortization calculator.
How to Find the Best Refinance Rate
Make sure to shop around to find the best mortgage refinance rates because interest rates vary from one mortgage lender to the next. Lenders evaluate people’s circumstances differently, but by following these steps, you can ensure you’re getting the best rate you’re eligible for.
1. Build your credit
Your credit score plays a big role in what refinance rate lenders will offer you. So before you apply for a home loan, be sure to review your credit reports for any errors. It’s also important to pay down credit card debt to improve your credit utilization ratio, and pay all of your bills on time over the long haul to ensure that your credit score is as high as possible.
2. Pay attention to LTV
Your loan-to-value ratio (LTV) measures how much equity you have in your home. Having a lower LTV will help you get a lower interest rate. To get the best rates and to avoid paying private mortgage insurance (PMI), aim for an LTV of no more than 80%. The longer you’ve been paying on your mortgage, the lower your LTV will be. You could also choose to make extra payments toward your principal to decrease your LTV. If you’re rolling the refinance fees into your new loan with a no-cost refinance, then you’ll need to have enough equity to absorb the extra costs.
3. Decide on your loan term
The length of your loan’s repayment term will also impact your refinance rate. Shorter term loans, such as 20-year or 15-year loans, have lower rates than longer repayment terms, all else being equal. Ideally, your new refinance loan won’t be adding years onto your mortgage, but you can also pay off your mortgage more quickly with a shorter loan term. The downside is that shorter repayment terms will increase your monthly payment, so you’ll need to be able to afford a larger payment to capture the extra savings on interest over the course of the new loan.
4. Choose the type of refinance loan
Certain types of refinancing typically have higher interest rates. If you want the lowest rate, avoid cash-out refinancing because it typically comes with a higher rate than a standard refinance. When you turn your equity into cash with a cash-out refinance loan, it increases your LTV, which can push your interest rate up.
5. Shop around for the lowest fees
Don’t only focus on the interest rate when shopping around. You should also pay attention to fees you’ll pay, which are factored into the annual percentage rate (APR). A loan’s APR also takes into account certain loan fees, so one loan could have a lower interest rate, but have a higher APR. You can easily compare closing costs and fees by reading the Loan Estimate your lender provides after you apply.
6. Preparing to Refinance
Once you’ve found the best refinance rates and terms for your situation, it’s time to close on the loan. The process of refinancing is similar to getting a mortgage when you first purchase a home, so you’ll follow many of the same steps.
Mortgage Refinancing: Frequently Asked Questions (FAQ)
What is a mortgage refinance?
A mortgage refinance involves taking out a new loan to pay off your current mortgage.
Refinancing your mortgage can help you in a number of ways. The biggest is the potential to save money by lowering your monthly mortgage payment, locking in a lower interest rate, adjusting the length of your loan, or getting rid of private mortgage insurance. You also might want to refinance to cash out some of your home equity and pay for home renovations or other expenses.
The process is similar to taking out an original home mortgage, so you should prepare in the same way. Before you apply, research your best options and organize all the financial documents you’ll need. You’ll want to shop around for the best refinance rates and loan terms.
How are refinance rates different from mortgage purchase rates?
Refinance rates typically move in tandem with mortgage purchase rates. If purchase rates are increasing, you can expect refinance rates to increase as well — and vice versa. And your personal financial situation will impact refinance rates in the same way it affects mortgage purchase rates. So a high credit score is essential to getting a better rate.
But in many cases, refinance rates tend to be slightly higher than mortgage purchase rates. The type of refinance you are using will also affect your rate. A cash-out refinance is considered more risky and will usually have a higher interest rate. The amount of equity you have in your home also matters, more equity tends to lead to lower rate.
When should you refinance?
Whether or not you should refinance your existing home loan depends a lot on current refinance rates and how they compare to your existing mortgage. When you refinance, you’ll typically pay 3%-6% of the new loan amount upfront in closing costs, or you could receive lender credits to cover these fees in exchange for a higher interest rate. With that in mind, crunch the numbers to ensure you’ll be saving over the life of the loan. If you do not keep the same home loan for the long term, then paying fewer fees upfront is a better option. However, if you’re certain that you won’t refinance again or sell the home within the next 5 to 10 years, then paying the fees, or rolling them into the loan amount, could be better.
Refinancing is an opportunity to lower your monthly payment and create some extra room in your monthly budget. The best way to do this is by scoring a significantly lower interest rate. You could also create short-term savings by choosing a new loan with a longer term, such as trading a 15-year mortgage refinance for a 30-year mortgage refinance. In that case, the tradeoff is you’ll end up paying more interest over the life of the loan because you’re extending the repayment period. So you’ll have to balance your priorities.
What is a good refinance rate?
Even with the recent uptick in interest rates, today’s refinance rates are exceptionally low compared to any time in the history of mortgage rates. There are a lot of personal factors that go into what rate you’re eligible for, but even if you don’t qualify for the lowest advertised rate you’ll likely be quoted a refinance rate that is lower than you could have qualified for 18 months prior.
But having a low rate doesn’t mean it’s a good rate for you. A refinance rate needs to be compared to your current interest rate. A good rule of thumb: If you can reduce your interest rate by 1% or more then refinancing can make sense. This is because you’ll want to be able to save enough on interest to offset any loan fees you pay to refinance.
Mortgage interest rate vs. APR
When comparing offers, make sure you look at the difference between the interest rate and the annual percentage rate (APR). The interest rate is what you’ll pay on the principal loan, while the APR includes the interest rate, other mortgage fees, and some closing costs. When looking at APRs, ask the lender what fees are included in the APR calculation so you can be sure you’re making an apples-to-apples comparison.
Can you negotiate refinance rates?
The refinance rate you’re quoted will change from one lender to the next, so it’s important to shop around. Getting loan estimates from 2-3 different lenders allows you to compare rates and fees against one another. Then you can negotiate for lower fees or a better rate.
Types of refinancing
When you refinance to only change the repayment term or interest rate, it’s known as a “rate and term” refinance. Typically, you’re replacing your existing loan with one that has a more favorable interest rate or terms. A longer loan term will have smaller monthly payments, but you’ll pay more interest over the life of the loan. A shorter term loan will have a lower interest rate, but a higher monthly payment.
There are also other types of refinance loans that apply to specific situations.
A “cash-out” refinance is used to turn your home equity into cash. For example, if you had a $50,000 mortgage and your home is worth $100,000, you could refinance for $80,000 and pocket the extra $30,000. This could give you an opportunity to make improvements that increase the value of your home, assuming you’re financially secure enough to take on the increased debt.
This type of refinancing can be an affordable way to tap into your home’s value. “Cash-out loans are extremely healthy in terms of their debt structures,” Mohtashami says. Mortgage loans typically have longer repayment periods, and lower interest rates than other types of financing.
- Lower interest rate than home equity loans or home equity lines of credit
- Good way to consolidate high-interest debt
- Possible tax deduction on the mortgage interest
- Higher interest rate than other types of refinancing
- Increased loan balance
- Resetting your loan’s repayment term
- Pay closing costs
- May have to pay private mortgage insurance
Another type of refinance is a “cash-in” refinance, where you can pay down your loan as part of the refinance to get a smaller monthly payment. Increasing your equity, or decreasing your principal balance relative to the value of your house, could also help you drop private mortgage insurance payments.
If you currently have a mortgage backed by the Federal Housing Administration (FHA) you could take advantage of the FHA Streamline Refinance program. This type of refinance functions like other refinancing options, but has different qualification standards. There’s no credit score minimum, income requirement, or home appraisal needed to qualify for the program. Instead, you need a history of on-time payments and the refinance must be beneficial for the homeowner, which typically means it will result in either lower payments or a shorter mortgage term.
Is now a good time to refinance?
As interest rates dropped over the past 18 months, there was a rush of homeowners looking to refinance. Now that rates have begun to inch upward, the number of borrowers who are refinancing their mortgages has begun to slow. But that doesn’t mean it’s too late for you.
If you haven’t refinanced recently, now’s a good time to consider it — if you can significantly reduce your interest rate or shave years off your mortgage. It’s important to factor in the thousands of dollars you’ll pay in upfront closing costs when you’re running the numbers. But reducing your monthly payment and paying off your mortgage much sooner can make the short-term costs well worth it over time. But this isn’t the case for everyone, because the lowest interest rates are available only to those with the best credit. So while this is an excellent time for many to consider a mortgage refinance, it doesn’t make sense for everyone.
Where are refinance rates headed?
This year, rates have fluctuated but overall they have been low compared to rate history. But, many experts believe rates will rise in 2021.
As the economy recovers and the Federal Reserve changes its low-rate policies the likely outcome will be rising mortgage rates. However, the expectation among experts isn’t for skyrocketing rates overnight, but rather a gradual rise over time.
What you will need to refinance
Getting all your paperwork in order before submitting a refinance application is a good way to make the closing process go more smoothly. Your lender should have a checklist for you, and it will include documents such as:
- Proof of income: Your most recent pay stubs, W-2s, 1099s, or tax returns from up to the past two years are required to verify your income and employment status.
- Proof of assets: Gather your most recent statements for bank accounts, retirement plans, and other investments.
- Documentation of current debt: You will need account statements for your current home loan, credit cards, and any other loans you have, like student loans or auto loans.
- Appraisal: Just like when you got your original mortgage, the bank will require you to have an appraisal done on the property to verify its current value.
- Insurance: You will need proof of homeowners and title insurance.
You may also need additional documentation for any alimony or child support you receive or are required to pay. And if you have a large gap in employment or negative marks on your credit report, the lender may require a letter from you explaining those circumstances. Also, given the current economic environment, lenders are vetting applicants more closely. You should expect them to verify your employment up to the day of closing, and if closing takes longer than expected you may need to resubmit your most recent documentation.
How to refinance
The process of refinancing is similar to taking out a mortgage to purchase a home. But refinancing a mortgage should be much easier because you won’t need to go through the entire homebuying process.
1. Prepare to refinance
Before you submit an application, you should review your finances. Gather all the necessary documents and check your credit report ahead of time. That way, you can verify that your credit report has no errors or address them in advance. Getting everything in order ahead of time will make the process, from application to closing, more smooth.
2. Decide what type of refinance loan fits your goals
Refinancing your existing mortgage into a new loan can make sense for a variety of reasons, and your goals will determine what type of loan is best for you. You may need a cash-out refinance if you want to complete much needed home improvements. But a rate and term refinance could help you cut your interest rate or shave years off of your loan term.
3. Compare lenders
Every mortgage lender will assess your situation differently, so it’s important to shop around. In order to accurately evaluate offers, you’ll need to submit an application. Once you do that, you can compare the Loan Estimate each lender provides.
4. Choose the best lender
In most cases, finding the best mortgage lender isn’t simply a matter of choosing the offer with the lowest combination of interest rate and fees. You should also consider working with a loan officer who has experience with the type of refinance loan you’re applying for. For example, if you’re using an FHA streamline refinance or a VA streamline refinance, it will be advantageous for you to work with a lender that has experience navigating the ins-and-outs of these types of government-backed loans.
5. Close on the refinance loan
Once you’ve picked a lender, the closing process begins. Typically, it takes anywhere from one to two months to close on a mortgage refinance. During closing, the lender will verify all of your financial information, as well as confirm your home’s value with an appraisal. On the final day of closing you’ll pay any closing costs and sign all the necessary paperwork.
How much equity do you need to refinance?
Having 20% equity in your home before you refinance your mortgage is ideal, although you can qualify with less equity. Having at least 20% equity will help you get the lowest refinance rates. The other advantage to having 20% equity is you will be able to avoid paying private mortgage insurance (PMI).
When calculating how much equity you’ll need to refinance, don’t forget to consider refinance closing costs. You can pay for closing costs out of pocket, but if you have enough equity you typically can roll them into the new loan. In that case it’s best to have enough equity to absorb the closing costs and still maintain 20% equity in the property.
Is it worth it to refinance?
Deciding to refinance your existing mortgage isn’t as straightforward as comparing the interest rates. You could refinance into a lower rate, but if you’re paying excessive upfront fees it could wipe out any potential savings.
So you need to look at the big picture when considering a mortgage refinance. Consider how long it will be before you sell or refinance again and calculate your break-even point to see how long it will take for your savings to offset the cost of refinancing.
What is the average cost of a refinance?
When you refinance, you can expect to pay 3% to 6% of the new loan amount upfront in closing costs. The average home loan balance is over $200,000, so you could be looking at $6,000 to $12,000 in refinancing fees.
You can sometimes roll the refinance closing costs directly into your new mortgage so you’re not paying out of pocket. This type of loan is often advertised as a no-closing-cost refinance. This is a bit of a misnomer because you’ll end up paying the same fees (plus interest), but they’ll just be spread out over the life of your loan. Alternatively, the lender may offer you a credit to cover, or reduce, the closing costs, in exchange for a higher interest rate.