- 6 Ways to Save on a Mortgage Refinance
- Pay closing costs and points
- Don’t take cash out
- Shop around
- Have a history with your lender
- Prepare for an appraisal
- How To Refinance Your Mortgage
- What is mortgage refinancing?
- The refinance clock is ticking
- Step 2: Check your credit score and history
- Step 3: Determine how much home equity you have
- Step 4: Shop multiple mortgage lenders
- Step 5: Be transparent about your finances
- Step 6: Prepare for the appraisal
- Step 7: Come to the closing with cash, if needed
- Step 8: Keep tabs on your loan
- Free up money each month
- Pay your home off faster
- Eliminate private mortgage insurance
- Tap your home’s equity
- Lock in a fixed-rate mortgage
- Refinancing isn’t free
- You may have a prepayment penalty
- Your total financing costs can increase
- Refinance vs. cash-out refinance: What’s the difference?
- Example of a no cash-out refinance (rate-and-term refinance)
- Example of a cash-out refinance
- Next steps: How to get the best refinance rate
- Learn more:
- Mortgage Refinance Calculator | Should You Refinance?
- Should I refinance my mortgage?
- Lower yourinterest rate
- Switch your mortgage type
- Pay off your loan faster
- Cash-out your home equity
- Refinance calculator terms and definitions
- How to decide if refinancing is worth it
- 5 questions to ask yourself beforerefinancing your mortgage
- 1. How muchequity do you have in your home?
- 2. What’syour credit score?
- 3. How long will you be in the home?
- 4. What’syour refinance goal?
- 5.What does your current loan look?
- Always shop around for the best refinance rate
6 Ways to Save on a Mortgage Refinance
Getting a lower interest rate is the main way homeowners save when refinancing a mortgage. A lower interest rate on the loan leads to lower monthly mortgage payments, which can be one of the main reasons for a refi.
But there are other ways to lower costs during a mortgage refinance, including ways to improve your financial profile to a lender so that you’ll qualify for a lower interest rate. Here are six ways to save on a mortgage refinance:
Pay closing costs and points
Many lenders advertise “no closing cost” loans, which sound great until you find out that the costs are buried in the higher interest rate, says Casey Fleming, a mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.”
Instead, consumers should ask their mortgage broker or lender what happens if they pay for costs and discount points. “Discount points” specifically refers to the fee paid to buy a lower interest rate; the more generic term “points” may refer to any upfront fee calculated as a percentage of the loan amount.
By paying the lender’s costs to buy down your interest rate, it allows more of your payment to go to principal reduction each month, Fleming says. “After a few years you owe quite a bit less than you would with the higher interest rate,” he says.
Fleming gives an example of a homeowner refinancing a $396,950 loan for a 30-year fixed mortgage, but one they planned to leave in seven years.
One option is for a 4.25 percent interest rate and no closing costs that has a monthly mortgage of $1,952 and a total cost of financing over the seven year holding period of $110,637.
The second option is a 3.75 percent interest rate with the borrower paying closing costs and 1.51 “points” that add up to $10,124 in costs. The monthly payment drops to $1,838 and the total cost of financing drops to $107,217.
The third option has the lowest interest rate at 3.625 percent, but with 2.392 “points” to be paid to get that low rate, the cost rises to $13,625 and brings the total cost over seven years up slightly to $107,349. The monthly mortgage is $1,810.
The second option is the least expensive option over seven years when comparing out-of-pocket costs with upfront and interest costs, and is $3,400 less than the first option of no closings costs or points.
Even with similar information in front of them, more than half of Fleming’s clients choose a zero-cost loan and finance at a higher rate, he says. Why? Persuasive advertising, he says.
A low credit score can lead to a higher interest rate and a higher cost to buy down that rate. A high score of 740 is often needed for the best mortgage rates seen online, says Allen Seelenbinder, a regional sales executive for Bank of America.
Before applying for a mortgage refi, homeowners should check their credit score (such as at AnnualCreditreport.com for a free report) and review it for accuracy. If something is wrong, ask to have it fixed, and work on improving the score. Someone with a lot of credit cards and credit card debts can improve their score by 70 to 80 points by paying off the cards.
You can also help your credit score by not using credit cards or opening new accounts while refinancing your mortgage
It’s important to do all of this before applying for a refi, Seelenbinder says.
“Once you apply for a mortgage loan, that credit score is going to stick with you through your application,” he says.
Don’t take cash out
Refinancing to a lower loan rate can make borrowing against your home equity through a cash-out refinance enticing.
Doing so can mean paying a slight premium on the rate, Seelenbinder says.
But it could also cause you to lose more equity in your home if home values start dropping again. If you decide to move in a few years, that money you cashed out with a refi could eliminate all of your home equity.
Shopping around for the best price makes sense for many things, from clothes to groceries and cars to a mortgage — which is ly to be the most expensive purchase of your lifetime.
But when shopping at lenders, be sure you’re comparing apples to apples and getting more than just the loan amount and terms, Seelenbinder says.
“When people shop frequently they just shop for a rate,” he says. Also ask if the loan-to-value ratio, or LTV, makes a difference in the refinancing rate. An LTV of less than 60 percent usually doesn’t make a difference in rates, Seelenbinder says, but having it be 5 percentage points higher could increase the rate or points to be paid to lower the rate.
Have a history with your lender
Refinancing with your current lender could save you money. At the very least, it could be less paperwork because you’re already a customer.
Having substantial assets at your bank could help you save on closing costs. Bank of America offers its Preferred Rewards members a lower origination fee on home loans.
Prepare for an appraisal
Not every mortgage refinance requires an appraisal of the home — where a professional assesses the value of the property — but an appraisal could help if the home is ly worth more than what the lender states.
That could lower your LTV and help avoid paying private mortgage insurance, along with receiving a lower interest rate.
To prepare for an appraisal, it can pay to spruce up your home with fresh paint, cleaned carpets and manicured landscaping, says Jeremy David Schachter, a mortgage advisor at Pinnacle Capital Mortgage in Phoenix.
If major remodeling is being done to improve the home’s value, make sure it’s complete before the appraiser gets there and not in a construction phase, Schachter says. He’s had clients who didn’t have kitchens or bathrooms and a refinance was delayed or cancelled.
Low mortgage rates can be an enticement for homeowners to refinance their loan and get a lower rate and a lower monthly mortgage payment. Getting those low rates, however, can take a little more legwork than walking into a lender and taking the first rate they offer.
By using the above methods, borrowers can hopefully get lower interest rates on a refi than they could have otherwise.
How To Refinance Your Mortgage
With mortgage rates pushed to historic lows during the pandemic, it can make sense to refinance your loan. Here’s what you need to know about the process, and when it’s a good idea.
What is mortgage refinancing?
Refinancing a mortgage means you get a new home loan to replace your existing one, with the option to withdraw a portion of your home’s equity out as cash in the process. If you can refinance into a loan that has a lower interest rate than you’re currently paying, you could save money on your monthly payment and overall cost of the loan.
The best time to consider a mortgage refinance is when interest rates sink below the level they were when you closed on your original loan. As a rule of thumb, it’s worth considering a refinance if you can lower your interest rate by at least half a percentage point, and you’re planning to stay in your home for at least a few years.
Another good opportunity is when your credit improves to the point where you qualify for a new loan that has a lower interest rate.
There are a variety of reasons to refinance that can make financial sense, including:
- To reduce your monthly mortgage payment by securing a lower interest rate
- When the costs of refinancing can be recouped in a reasonable time period
- To get a shorter term, such as a 15-year loan to replace a 30-year mortgage, so you can pay it off faster and pay a lot less in total interest
- To switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan — a smart move if you think rates are going to go up in the future
- To extract cash from your home’s equity in a cash-out refinance
- To eliminate mortgage insurance if you’ve built up 20 percent equity in your home
Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.
The refinance clock is ticking
Mortgage rates fell to all-time lows in late 2020 and early 2021. However, rates began edging up in February 2021. Mortgage experts expect rates to rise as the coronavirus vaccine is distributed and the U.S. economy returns to normal.
Mortgage rates probably won’t soar — the Federal Reserve has vowed to keep the rate it controls near-zero until further notice. The Fed doesn’t directly control mortgage rates, but its decisions do influence the mortgage market.
If mortgage rates do in fact follow the experts’ consensus, they’ll probably end up in the range of 3.5 percent by the end of 2021. In other words, the window to refinance is gradually tightening rather than slamming shut.
There should be a good reason why you’re refinancing, whether it’s to reduce your monthly payment, shorten the term of your loan or pull out equity for home repairs or debt repayment.
“Every situation is unique,” says Ann Thompson, Bank of America’s head of retail sales West. “Everyone has different priorities.”
What to consider: If you’re reducing your interest rate but restarting the clock on a 30-year mortgage, you may end up paying less every month, but more over the life of your loan. That’s because the bulk of your interest charges are in the early years of a mortgage.
Step 2: Check your credit score and history
You’ll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you — and the better your chances of underwriters approving your loan.
What to consider: It may make sense to spend a few months boosting your credit score before you start the refinancing process. Also, mortgage borrowers’ credit scores have risen to record highs as the pandemic made lenders stricter about extending credit.
Step 3: Determine how much home equity you have
Your home equity is the value of your home in excess of what you owe your mortgage lender on your loan. To figure it out, check your mortgage statement to see your current balance.
Then, check online home search sites or get a real estate agent to run an analysis to find the current estimated value of your home. Your home equity is the difference between the two.
For example, if you still owe $250,000 on your home, and it is worth $325,000, your home equity is $75,000.
What to consider: You may be able to refinance a conventional loan with as little as 5 percent equity, but you’ll get better rates and fewer fees if you have more than 20 percent equity. The more equity you have in your home, the less risky the loan is to the lender.
Step 4: Shop multiple mortgage lenders
Getting quotes from multiple mortgage lenders can save you thousands. Once you’ve chosen a lender, discuss when it’s best to lock in your rate so you won’t have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether they’ll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
Step 5: Be transparent about your finances
Gather recent pay stubs, federal tax returns, bank statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose your assets and liabilities upfront.
What to consider: Having your documentation ready before starting the refinancing process can make it go more smoothly.
Step 6: Prepare for the appraisal
Some mortgages lenders require a mortgage refinance appraisal to determine your home’s current market value for a refinance approval.
What to consider: You’ll pay a few hundred dollars for the appraisal. In addition, letting the lender know of any improvements or repairs you’ve made since purchasing your home could lead to a higher appraisal.
Step 7: Come to the closing with cash, if needed
The closing disclosure, as well as the loan estimate, will list how much money you need to pay pocket to close the mortgage.
What to consider: You might be able to finance those costs, which typically amount to a few thousand dollars, but you’ll ly pay more for it through a higher rate or loan amount.
Step 8: Keep tabs on your loan
Store copies of your closing paperwork in a safe location and set up autopayments to make sure you stay current on your mortgage. Many mortgage lenders will also give you a lower rate if you sign up for auto-payment.
What to consider: Your lender might resell your loan on the secondary market either immediately after closing or years later. That means you’ll owe mortgage payments to a different company, so keep an eye out for mail notifying you of any such changes.
Free up money each month
A rate-and-term refinance replaces your mortgage with a new loan that has a lower rate, meaning you have to pay less to your lender each month.
“There’s a significant opportunity to reduce your monthly cash requirements,” says Glenn Brunker, president of Ally Home. “Depending on the size of your mortgage, it could be $75 or $100 per month, or even several hundred dollars a month.”
Pay your home off faster
You may be able to refinance into a loan with a lower interest rate and a shorter term.
The savings in interest payments could be substantial, for example, if you’re able to refinance into a 15-year mortgage from a 30-year loan.
Still, if you’re putting more cash into paying off your mortgage, you may have less money on hand for expenses saving for retirement, college or an emergency fund.
Eliminate private mortgage insurance
If your original down payment was less than 20 percent, you have ly been paying private mortgage insurance, or PMI, an extra fee on every payment. If rising home values and your loan payments have pushed your home equity above 20 percent, you might be able to refinance into a new loan without PMI.
Tap your home’s equity
Homeowners with well over 20 percent equity in their home sometimes turn to cash-out refinancing.
That’s when you refinance your home loan into a new mortgage for a larger amount to meet a specific financial need and receive the difference in cash.
This may make sense if you’re considering using the money to invest back into your home through a major remodeling project or to pay off high-interest debt.
Lock in a fixed-rate mortgage
If you’re in an adjustable-rate mortgage (ARM) that’s about to reset and you believe that interest rates are going to rise, you can refinance into a fixed-rate loan. Your new rate might be higher than what you’re paying now, but you’re guaranteed it won’t rise in the future.
Refinancing isn’t free
Your refinanced mortgage comes with costs, such as an origination fee, an appraisal, title insurance, taxes and other fees, just your original mortgage.
Even if the refi results in a lower monthly payment, you won’t actually save money until the monthly savings offset the cost of refinancing.
You’ll need to do some math (use this calculator) to figure out how many months it will take to reach this break-even point. If there’s a chance you’re going to move before then, refinancing is probably not the best move.
You may have a prepayment penalty
Some mortgage lenders charge you extra for paying off your loan amount early. A high prepayment penalty could tip the balance in favor of sticking with your original mortgage.
Your total financing costs can increase
If you refinance to a new 30-year mortgage, you’re ly going to pay significantly more interest and fees over the life of your loan than if you’d kept the original mortgage.
Refinance vs. cash-out refinance: What’s the difference?
When you refinance in order to reset your interest rate or term, or to switch, say, from an ARM to a fixed-rate mortgage, that’s called a no cash-out refinance, or a rate-and-term refinance.
Rate-and-term refinancing pays off one loan with the proceeds from the new loan, using the same property as collateral.
This type of loan allows you to take advantage of lower interest rates or shorten the term of your mortgage to build equity more quickly.
By contrast, cash-out refinancing leaves you with more cash than you need to pay off your existing mortgage, closing costs, points and any mortgage liens. You can use the cash for any purpose. To be eligible for cash-out refinancing, you typically need to have substantially more than 20 percent equity in your home.
Example of a no cash-out refinance (rate-and-term refinance)
Jessica gets a $100,000 mortgage with an interest rate of 5.5 percent. Three years later, interest rates have fallen, and Jessica can refinance with an interest rate of 4 percent. After 36 on-time payments, she still owes about $95,700.
In this situation, Jessica can save more than $100 per month by refinancing and starting over with a 30-year loan. Or she can save $85 per month, while keeping the loan’s original payoff date, paying it off in 27 years, and also reducing the total cost of the loan by about $8,000.
Better still in terms of saving on interest would be to refi into a 15-year loan. The monthly payments will be higher, but the interest savings is massive.
Example of a cash-out refinance
Christopher and Andre owe $120,000 on a mortgage on a home that’s worth $200,000. That means that they have 40 percent, or $80,000, in equity. With a cash-out refinance, they could refinance for more than the $120,000 they owe.
For example, they could refinance for $150,000. With that, they could pay off the $120,000 on the current loan and have $30,000 cash to pay for home improvement and other expenses. That would leave them with $50,000, or 25 percent equity.
Next steps: How to get the best refinance rate
Once you’ve determined why you want to refinance and the type of loan you want, you’re ready to shop lenders and compare refinance rates. Get quotes from at least three mortgage lenders, including a mortgage broker, a bank and an online lender. Be sure to compare their rates as well as fees and other charges that could add to the overall cost of the loan.
Mortgage Refinance Calculator | Should You Refinance?
Refinancing is usually worth it if it saves you money over the life of your loan. Use this mortgage refinance calculator to estimate how much a new loan could save you.
Keep in mind that the calculator provides an estimate only; your new monthly payment may be different from what’s shown.
To get a more accurate number, request estimates from lenders so you can see how low of a rate and payment you qualify for.
Check your refinance rates today (Mar 25th, 2021)
Should I refinance my mortgage?
Are you trying to decide whether to refinanceyourremaining mortgage loan amount?
Here’s a look at some of the mostcommon reasons to consider refinancing.
Lower yourinterest rate
Getting a lower interest rate is by far the most popular reason to refinance a mortgage.
If today’s rates are lower than the rate on your current loan, refinancing could substantially reduce your monthly mortgage payments. A refinance could also help you save thousands of dollars in interest over the life of your loan.
Switch your mortgage type
Refinancing gives you a chance to choose a different loantype. Your new loan can reflect your current financial life instead ofreflecting your needs as they were when you took out the original mortgage.
For example, if you have anadjustable-rate mortgage (ARM) and the interest rateis about to increase, you can change to a more stable fixed-rate mortgage.
Or if you have an FHA loan and you want to stop paying mortgage insurance, you may be able to refinance to a conventional loan that does not require private mortgage insurance.
Borrowers can also choose a shorter mortgage term when theyrefinance.
Replacing a 30-year mortgage with a 15-year loan, for example, can save a lot in interest. But keep in mind that a shorter loan term results in higher monthly payments.
Pay off your loan faster
In most cases, shortening your mortgage termwill allow you to pay the loan off faster.
A shorter term often means you’ll have a higher monthly payment. But you’ll ly pay less interest over the life of your loan because you are making fewer payments.
And shorter loan terms, a 15-year fixed, usually offer lower interest rates than a longer-term loan.
If the payments on a shorter loan term are too high for your budget, there are other ways to pay off your mortgage early.
For instance, you might refinance to a better interest rate and lower your monthly payments. Then, you can take the money you’re saving and use it to “prepay” your mortgage by paying a little extra each month. This way, you’ll pay the principal off faster and save money on interest in the long run.
Cash-out your home equity
If you have enough equity in your home, you may be able to do a cash-out refinance.
With a cash-out refinance, your new loan amount is higherthan your current mortgage balance. The bigger loan amount is first used to payoff your existing loan, and the ‘extra’ is returned to you as cash.
Funds from a cash-out refinance can be used for anything, but some of the best uses include home improvements, debt consolidation, paying for college education, or buying another property.
Refinance calculator terms and definitions
To get the most precise estimates from our mortgage refinancecalculator, you’ll need some information about yourcurrent mortgage and your potential new loan.
Below are the key pieces ofinformation you’ll need and where to find them.
Current loan balance: Refers to the remaining principal balance on your existing loan. This can be found on your latest mortgage statement.
Current monthly payment: Includes only the payments you make toward principal and interest each month. If your monthly payment also goes toward escrow (to cover taxes and insurance), you should check with your mortgage lender to determine the exact portion that goes toward principal and interest. Your statement should also show this breakdown.
Interest rate: The amount you pay each year to borrow money from your lender. To use a refinance calculator, you’ll need both your current loan’s interest rate and your expected new interest rate. If you’re not sure what rate your new loan may carry, you can get an estimate here.
Loan term: The loan term is how long your mortgage loan lasts. Usually, refinancing to a 30-year loan will lower monthly payments the most. If your goal is to pay off your loan sooner, you may want a loan with a shorter mortgage term.
Estimated closing costs: You’ll pay closing costs to refinance your mortgage, just as you did with the initial loan. These vary by mortgage lender but usually come out to around 2 to 5 percent of your total loan balance.
Closing costs typically include loan origination fees, appraisal fees, and legal fees, as well as prepaid interest, taxes, and insurance.
How to decide if refinancing is worth it
So, is refinancing worth it?Generally, a refinance is worthwhile if you’ll be in the home longenough to reach the “break-even point” — the date at which your savingsoutweigh the closing costs you paid to refinance your loan.
For example, let’s say you’ll save$200 per month by refinancing, and your closing costs will come in around$4,000. In order to make this refinance scenario worth it, you’ll need to be inthe home at least 20 months to hit your break-even point and make up that$4,000.
If you plan to stay in the home atleast that long, then a refinance is most certainly worth it. Each month you’re in the loanbeyond your break-even point adds to your total savings.
- Monthlysavings: $200
- Refinanceclosing costs:$4,000
- Time to break even:$4,000 / $200 = 20 months
Another common way to think about refinancecosts is the “two-year rule.”
The two-year rule says that,generally, the interest you save over the first two years should be equal to ormore than your total refinance closing costs.
Use the “two-year rule” whenrefinancing into a shorter loan term. You ly won’t save money monthly byconverting your 30-year loan into a 15- or 10-year one. But you will save a tonin interest.
5 questions to ask yourself beforerefinancing your mortgage
Determining your break-even pointisn’t the only way to decide whether to refinance.
You should also ask yourself thefollowing questions to gauge whether a new loan is theright move for you:
1. How muchequity do you have in your home?
Your equity is the portion of your home value that youalready own. If your house is worth $200,000 and you owe $175,000 on yourexisting mortgage, your equity would be $25,000, or 12.5%.
If you have at least 20% equity in your home, you may be ableto remove private mortgage insurance or FHA mortgage insurance with arefinance. This will lower your payment even further and add to your overallsavings.
For a cash-out refinance you typically need to havesubstantial equity, because lenders will require you to leave at least 20% ofthe home’s value untouched.
2. What’syour credit score?
You don’t need perfect credit torefinance, but your credit score will play a role. Thebetter your score, the better your interest rate will be — andthe more you’ll stand to save.
Here are the typical minimum credit score requirements formajor refinance programs:
- Conventional refinance — 620
- Conventional cash-out refinance — 620
- Jumbo loan refinance — 660-700
- FHA refinance — 580
- FHA cash-out refinance — 600
- FHA streamline refinance — No credit check required
- VA cash-out refinance — 620
- VA IRRRL — No credit check required
Keepin mind, credit score requirements vary by lender. So if your current lendersays your score is too low to refinance, you may have better luck with another.
3. How long will you be in the home?
Before you consider a refinance,you should have at least a rough idea of how long you plan to be in the home.If you’re not sure, or if youexpect changes in your job or living situation in the near future, a refinancemight not be wise.
4. What’syour refinance goal?
Lowering your rate and current monthlypayment are just two of the things you can do with a refinance. Refinancing canalso help you shorten your loan term and pay off your mortgage sooner.
Or you can use the new loan totap home equity for home improvements or to pay off higher-interest debts. Home improvements can add to yourhome value, enhancing your real estate investment even more.
5.What does your current loan look?
Before choosing to refinance, youshould have a good ideaof how much you owe on your existing loan andhow long it would take you to pay off the balance.
If you’ve almost paid off your current loan, you could windup paying more in total interest payments by resetting your balance with arefinance — even at today’s rates.
For instance, if you’re 8 years into a 30-year loan, considerrefinancing into a 20-year loan. You could potentially shave a couple years offof your loan and reduce your payment.
Also, check to see if your current lender chargesprepayment penalties. These fees would add to your total costs, eating intoyour savings as well.
Always shop around for the best refinance rate
If you want to maximize your mortgage refinance savings, you’ll have to shop around first.
We recommend getting quotes from at least three lenders, and comparing each of these on interest rate, closing costs, and other terms.
Ready to lock in a lower rate?
Verify your new rate (Mar 25th, 2021)