Compare Current Refinance Rates | NextAdvisor with TIME

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.

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

Whether or not you should refinance your existing home depends a lot on current refinance rates and how they compare to your existing mortgage. When you refinance, you can expect to pay 3%-6% of the new loan amount upfront in closing costs (or, that figure can be added directly to your new loan). With that in mind, crunch the numbers to ensure you’ll be saving over the life of the loan. If you aren’t planning on staying in your current home for the long term, then you may not have enough time to recoup the costs.

Refinancing is an opportunity to lower your monthly payment and create some 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 for a 30-year mortgage. In that case, the tradeoff is that you’ll end up paying more interest over the life of the loan. So you’ll have to balance your priorities.

Mortgage refinance rates have been dropping since the COVID-19 pandemic began and have hit record lows dipping below 3% for the first time ever in August and September. A big factor impacting mortgage refinance rates has been the Federal Reserve’s desire to stimulate the economy with low interest rates. And it doesn’t look like interest rates will be increasing anytime soon, as the Federal Reserve has indicated it expects to keep interest rates low for years to come.

That’s good news if you’re hoping to refinance your mortgage, but you can expect refinance rates to creep up slightly starting in December 2020. This is when Fannie Mae and Freddie Mac will introduce a new Adverse Market Refinance Fee, which will apply to new mortgage refinances that meet their guidelines. While this fee is technically paid by the lender, the cost will likely be passed along to the borrower in the form of higher interest rates or fees.

Although average rates are extremely low, that doesn’t necessarily mean you’ll be able to qualify for a refinance rate of 3% or less. Lenders offer better refinance rates to borrowers with stronger financial profiles and credit scores.

Even if you can get the lowest advertised interest rate, you also need to pay attention to the annual percentage rate (APR), which factors in fees. You may get a low interest rate, but pay excessive origination fees or discount points. In that situation you could end up with a higher APR as the refinance could be more expensive than advertised. So take the time to compare mortgage lenders and be sure you’re getting the best overall deal.

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.

Refinance rates aren’t exactly the kind of thing you can negotiate, but you can 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.

Nearly all types of refinance loans fall under the “rate and term” category, which is simply when either the rate or repayment term on your mortgage is changed. 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.

Cash-out refinance

A “cash-out” refinance is used to turn your home’s value 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.

Cash-in refinance

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.

FHA streamline

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.

In 2020, rates hit new all-time lows, sparking a refinance boom. However, as interest rates have slowly increased, the number of borrowers looking to refinance has begun to shrink. But that doesn’t mean it’s not an excellent time to refinance. Refinance application numbers are still higher than before the pandemic. 

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. Not only that, but lenders have tightened their standards recently, and if you don’t have a secure source of income you may not be able to qualify for a refinance. So while this is an excellent time for many to consider a mortgage refinance, it doesn’t make sense for everyone.

This year rates have been a bit up and down. We saw two months of steady increases, followed by a month-long decline in April. But even with these fluctuations, rates are still favorable compared to the overall rate history of the last few years. 

Many experts believe that rates will rise in 2021, but are likely to make only moderate gains by the end of 2021. This increase could be driven by an expanding economy as COVID-19 vaccination rates increase and the unemployed begin to return to work.

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.

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.

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.

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.

When you refinance, you can expect to pay 2% to 5% of the new loan amount upfront in closing costs. With the average home value climbing north of $260,000, you could be looking at $5,000 to $13,000 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.