Personal Finance. Your Practice. Popular Courses. Part Of. Know the Basics. Effects on Financial Status. When to Refinance. How to Refinance. Refinancing vs. Other Options. Home Ownership Refinancing A Home. Table of Contents Expand. Refinancing to Lower Rate. Refinancing to Shorten Term. Refinancing to an ARM or Fixed. Refinancing to Tap Equity. The Bottom Line. Key Takeaways Getting a mortgage with a lower interest rate is one of the best reasons to refinance.
When interest rates drop, consider refinancing to shorten the term of your mortgage and pay significantly less in interest payments. Switching to a fixed-rate mortgage—or to an adjustable-rate one—can make sense depending on the rates and how long you plan to remain in your current home. Tapping equity or consolidating debt are other reasons to refinance—but beware, doing so can sometimes worsen debt problems.
Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. When interest rates drop and many homeowners want to refinance, lenders get busy and refinancing can take longer. Refinancing can lower your monthly mortgage payment by reducing your interest rate or increasing your loan term. Refinancing also can lower your long-run interest costs through a lower mortgage rate, shorter loan term or both.
It also can help you get rid of mortgage insurance. Closing costs such as the origination fee, appraisal fee, title insurance fee and credit report fee are always an important factor in deciding whether to refinance. You can calculate this point by dividing your closing costs by the monthly savings from your new payment. Current monthly payment New monthly payment. Between and the first quarter of , the median number of years a borrower has kept a mortgage before refinancing is 3.
If you think your new loan will be your last, make sure to account for any additional years of interest you will be paying. When market interest rates drop, refinancing to get a lower interest rate can lower your monthly payment, lower your total interest payments or both. Another thing that can lower your monthly payment is paying interest on a smaller principal amount, possibly over more years.
This is the most common choice: a rate-and-term refinance. A higher credit score will help you get a better interest rate on your mortgage. Almost 3 in 4 homeowners who refinanced in April had a credit score of or higher, according to mortgage processor Ellie Mae. The average FICO score was Bringing cash to closing might also get you a slightly lower interest rate or allow you to avoid private mortgage insurance PMI.
Three percent of borrowers did this during the first quarter of While cash-out refi rates can be a bit higher than rate-and-term refinance rates, there still may be no cheaper way to borrow money.
If you refinance from a year to a year mortgage, your monthly payment will often increase. But not only is the interest rate on year mortgages lower; shaving years off your mortgage will mean paying less interest over time. That said, with mortgage interest rates so low, some people prefer to spend more years paying off their home so they have more cash to invest at a higher rate and more years for their investment earnings to compound.
Eliminating private mortgage insurance on a conventional loan is not, by itself, a reason to refinance. Some borrowers refinance because they have an adjustable-rate mortgage and they want to lock in a fixed rate.
Victoria Araj 6-minute read November 03, Share:. Let's take a closer look at the refinancing process. Applying The first step of this process is to review the types of refinance to find the option that works best for you. Underwriting Once you submit your application, your lender begins the underwriting process. Home Appraisal Just like when you bought your home, you must get an appraisal before you refinance. Get approved to refinance. See expert-recommended refinance options and customize them to fit your budget.
Start My Application. Change Your Loan Term Many people refinance to shorten their loan term to save on interest. You can also lengthen your loan term to lower your monthly payment. Lower Your Interest Rate Interest rates are always changing. Change Your Loan Type There are many reasons a different type of loan may benefit you. Cash Out Your Equity With a cash-out refinance , you borrow more than you owe on your home and pocket the difference as cash.
What Does It Cost to Refinance? Great news! Rates are still low in Missed your chance for historically low mortgage rates in ? Act now! See What You Qualify For. Related Resources. The information on this site does not modify any insurance policy terms in any way. Mortgage refinancing entails replacing your current mortgage with a new loan, ideally at a lower interest rate.
When you refinance, your new loan will have a different interest rate and terms, and could be from a different lender than the one you originally worked with. With this new loan, you might be resetting the repayment clock. That means you have 25 years left on the loan. Refinancing comes with closing costs , which can affect whether getting a new mortgage makes financial sense for you. These costs can be between 2 percent and 5 percent of the amount you refinance. Common closing costs include discount points, an origination fee and an appraisal fee.
Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators. There are many good reasons to pursue a refinance, the biggest of which is lowering your interest rate.
If you can reduce your rate by one-half to three-quarters of a percentage point or more, refinancing is likely worth it, as long as you plan to stay in the home long enough to recoup the closing costs.
You can also refinance to shorten your loan term and pay it off faster, resulting in less interest paid over the life of your loan. One option is refinancing a year mortgage into a year one.
If you have an adjustable-rate mortgage, refinancing to a fixed-rate loan can be a smart move, too. There are a few types of mortgage refinancing options to choose from:. Before you start applying for offers:.
Take the time to compare offers from a few different mortgage refinance lenders. The interest rate is of course a major consideration, but also take the time to review the closing costs and other loan terms.
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