You can also buy a lower rate by paying for discount points. Rates and fees also vary from lender to lender, so you want to be sure to shop around when refinancing a home loan to be sure to get the best deal. For rate quotes tailored to your credit and financial profile, you can use the form at the top of the page. How does refinancing work? While many borrowers refinance their home loans, it's still something that a lot of people are unfamiliar with.
But at its basic level, refinancing a home loan is pretty simple. You take out a new loan and use it to pay off the old one. The refinance loan replaces your current mortgage, and from then on you make your mortgage payments to your new lender. People often refinance a home loan because they can get a lower mortgage rate than they're currently paying.
Or they may be looking to shorten their loan term to pay it off faster. Some do it to switch loan types, such as from an adjustable-rate mortgage ARM to a fixed-rate loan. Yet another option is a cash-out refinance, which is a combination of a home equity loan and a refinance in the same package.
The definition of "home loan" also includes home equity loans and home equity lines of credit HELOCs , which can be refinanced as well. But that's less common than refinancing the primary lien used to purchase the property.
Any kind of loan can be refinanced, including mortgages, auto loans, business loans, etc. But our focus here will be on refinancing home loans. Prefer to speak to someone? Here are the key things to know: Interest rates on a home loan refinance are comparable to regular mortgage rates. You don't pay a higher rate just because you're refinancing your home. Loan refinance rates vary over time in response to market conditions.
The rate an individual borrower will pay depends on a number of personal factors, including credit score, the amount of home equity they have and the type of loan they're getting. Interest rates for home loan refinancing vary from lender to lender, so it pays to shop around. Don't simply go for the lowest rate you see advertised — check out the fees as well. Many home loan refinancing companies charge higher fees as a way of offsetting a low advertised rate. Don't just check advertised rates.
Request personalized rate quotes to find out exactly what a lender will offer someone with your borrower profile. Get at least three, preferably more.
You can call lenders directly or use a rate request form like the one at the top of this page to obtain quotes from several lenders at once. One way of getting lower refinance mortgage rates is by paying for discount points. Discount points let you buy a lower rate by paying an additional fee up front. For every one percent of the loan amount you pay a single point , the rate is reduced by a certain amount, often one-eighth to one-quarter of a percent.
Buying points can make good financial sense, particularly if you plan to stay in the home a long time. Unfortunately, discount points are sometimes used by lenders to disguise the true cost of a loan.
A low rate that includes two or three discount points may be more costly than a higher rate with no points. Most refinance interest rates that you see advertised will include discount points, often in fractions of a point.
So you need to pay attention to them when comparing refinance rates from different lenders. A handy way of comparing the "true" cost of various loan refinance offers is to check the APR, or annual percentage rate.
It's not percent reliable — it assumes you won't sell the home or refinance again before the loan is paid off, and it's not very useful with adjustable rate mortgages — but it's a good way to make an overall comparison. Why do people refinance home loans? There are many reasons for refinancing a home loan. Here are some of the more common ones: To get a lower rate: If mortgage rates have fallen or your credit has improved since you took out your current home loan, you may be able to get a lower rate by refinancing.
To pay off your home loan faster: You can often cut years off your mortgage and save tens of thousands of dollars in interest if you refinance your home loan to a shorter term. For example, if you've got 20 years left on your loan, you might refinance into a year fixed-rate mortgage and pay it off five years faster.
Because short-term home loans have lower rates than longer ones do, you can often do this with little or no increase in your monthly payments. You can borrow money through a cash-out refinance. It's really a type of home equity loan. This works particularly well if you can also lower your mortgage rate at the same time. A cash-out refinance can be used to consolidate debt. You simply use the proceeds to pay off credit cards, medical bills, a second mortgage or any high-interest loans.
Your loan refinance rate will likely be lower than the rates you were paying and you get to consolidate your bills into a single monthly mortgage payment. To change mortgage types: People sometimes use a home loan refinance to exchange an adjustable-rate mortgage ARM for a fixed-rate one. This may be because their ARM is about to readjust and they want to lock in a predictable rate.
To eliminate mortgage insurance: Borrowers who put less than 10 percent down on an FHA loan after June 3, must carry mortgage insurance for the life of the home loan.
However, they can still get out of it by refinancing once they reach 20 percent home equity, at which point mortgage insurance would not be required on the new loan. A refinance is necessary to remove a person's name from a home loan after a divorce.
And that could hurt your credit as well. Don't Know Your Credit Score? Find out for free When to refinance a home loan? You can refinance a home loan almost any time you like. But there are a few potential limitations.
Most lenders are reluctant to consider an immediate refinance shortly after you bought the home or previously refinanced; they like to see that at least one year has passed since you took out the last home loan. That isn't a hard and fast rule, though.
A more common concern is that some home loans have prepayment penalties if you refinance them or otherwise pay them off within years. That doesn't prevent you from refinancing but does make it more expensive.
You often find these on "no closing cost" home loans where the lender charges a higher rate to make up for waiving the closing fees, or on home loans to borrowers with weak credit.
Sometimes, when refinance rates are falling or when they've bumped up recently, people wonder if they should wait to see if they'll fall further or go back down before refinancing. This is rarely a good idea. Refinance rates are unpredictable, even for professionals, and no one knows that they may do next week or a year from now.
The best rule is that if it makes financial sense, go ahead and refinance and don't worry about where rates might be headed down the road. When does refinancing make sense? When refinancing to a lower mortgage rate, the key factor is whether you'll save money. In other words, will you save enough with a lower rate to offset the closing costs you pay to refinance?
So how do you know if refinancing is a good decision? When should you refinance? The usual guideline is that you should be able to reduce your rate by a full percentage point when refinancing, though that isn't a strict rule. A more reliable way is to calculate your break-even point — that is, how long will it take your cumulative savings from a lower rate to exceed the fees you paid to refinance? If you can reach your break-even point in years, you'll likely benefit from refinancing.
Much longer than that and you may sell the home before you break even - people tend to move every five years or so. However, if you expect to remain in the home a long time, you could still come out ahead even if it takes you seven or eight years to reach your break-even point.
A refinance mortgage rate calculator can be a useful tool here. Many of them are set up to help figure your break-even point automatically. You'd do a similar calculation if you're thinking about consolidating a home equity loan or other second mortgage into your primary home loan. What would the closing costs be and how much would you save each month by rolling the two loans together? When refinancing to a shorter term home loan, the key is whether you can do so while keeping your monthly payments affordable.
If you've got 20 years left on a your mortgage and can refinance to a year loan with only a small increase in your monthly payments, it would probably be worthwhile to do so. But you don't want to strain your budget, no matter how much you'd save over the long term. On a cash-out refinance loan , the question is whether that would be a more affordable choice than other options for borrowing the money, such as a home equity loan or line or credit.
Because you're paying refinance closing costs on the entire home loan, this option works best if you can reduce your mortgage rate at the same time, or are borrowing a large sum of money.
The decision whether to refinance out of an ARM is a subjective one. How much of an increase in your mortgage rate can you afford? How uncertain are you about the direction rates are headed? The question here is whether you want to buy financial predictability by refinancing. Get Your Personalized Quote How to refinance your home loan?