Is now the right time to refinance?

Bills shaped like house

For most homeowners, it’s still a good time to refinance.

By any historical measure, home loans remain incredibly cheap, and you'll pay less than borrowers did last June.

The average 30-year fixed-rate loan — the most popular way to finance a home — costs only just over half of a percentage point more than it did when rates bottomed out in late 2012.

That increase adds only $37 or less to monthly payments for every $100,000 borrowed.

The typical 15-year fixed-rate loan is about six-tenths of a point higher, while the average 30-year jumbo fixed-rate mortgage is only up a quarter point after falling to a new record low this spring.

Jumbo loans are mortgages that are too large to be purchased by Fannie Mae and Freddie Mac, the two government-owned companies that buy or guarantee most of the mortgages issued by banks and other lenders.

The largest loans they can buy depend on where the home is located but range from $417,000 in most places to $625,000 in the nation’s most expensive cities. If you need to borrow more than that, then you’ll need a jumbo loan.

National Average Mortgage Rates

Type of loan Current average Record-low average Established
30-year fixed rate 4.15% 3.50% Dec. 5, 2012
15-year fixed rate 3.39% 2.75% May 1, 2013
30-year fixed jumbo 4.17% 3.90% April 15, 2015
5/1 ARM 3.24% 2.63% May 1, 2013

So does a new loan make sense for you?

It probably does if you can shave 1 percentage point or more from your current rate.

Let's say you have a 30-year home loan rate of 5.6%.

Refinance at current interest rates, and you'll reduce your monthly payments by about $110 a month for every $100,000 you borrow.

The best deal for most borrowers is the one that offers the lowest interest rate, with no points and lender fees of $2,000 or less.

Our refinancing calculator can help you evaluate any offer more precisely.

It will calculate how much your monthly payment will decrease and how long it will take to recoup any fees and closing costs.

Property values have also increased in most parts of the country, boosting the amount of equity homeowners hold in the homes.

The more equity you have — the difference between the balance on your current mortgage and your home's current market value — the easier it is to refinance.

Refi by the Numbers

Source: Freddie Mac, fourth-quarter 2014 analysis

Number Explanation
1.3 percentage points Average interest rate reduction
$2,500 Amount saved in 1 year on a $200,000 loan
34% Percentage of borrowers who shortened loan term
95% Percentage of borrowers who took a fixed-rate refi

Borrowers with good credit and 20% equity can qualify for a conventional loan, which is the most common, and usually the cheapest, way to go for most borrowers.

The average cost of a 30-year conventional loan was 4.15% in April, according to Ellie Mae, a California-based mortgage technology firm whose software is used by many lenders.

Borrowers who successfully refinanced their homes had an average FICO credit score of 738 — the lowest of the year — and 30% equity.

You can refinance with an FHA loan even if you have little or no equity in your home, a much lower credit score or higher debt than lenders usually accept.

The Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development, doesn't actually make loans.

It guarantees that private lenders will be repaid, even if you default. But you'll pay for that guarantee in the form of up-front and monthly mortgage insurance.

With the government standing behind you, banks and mortgage companies can make loans they wouldn't normally offer at competitive interest rates that could cut your monthly payments by hundreds of dollars.

The average cost of an FHA loan was 3.99% — or a little less than for conventional mortgages. But that doesn't include the mortgage insurance, and the significant initial and monthly premiums they require, and that makes them more expensive.

Borrowers who successfully refinanced their homes with an FHA loan had an average FICO credit score of 682 and 15% equity.

Here's where to learn more about the three most common options for refinancing your home with the FHA's help.

An even better option is to refinance with a VA loan, which we consider to be the best mortgage program around.

Millions of veterans, as well as anyone on active duty and those in the National Guard and reserve units, are eligible. (Click here for full eligibility requirements.)

Refinances by Year

Source: Mortgage Bankers Association, Mortgage Finance Forecasts

Year Value of loans
2012 $1.25 trillion
2013 $1.10 trillion
2014 $484 billion
2015 (projected) $501 billion
2016 (projected) $379 billion

With the Department of Veterans Affairs standing behind these loans, they're also less risky for lenders.

That means you can have a lower credit score and less home equity than you’d need for a conventional loan and, in some cases, a higher debt-to-income ratio.

Indeed, you can have no equity and qualify for a new mortgage, and there's never any mortgage insurance required with a VA loan.

The average cost of a VA loan was 3.83% — or about a quarter of a point less than for conventional mortgages.

Borrowers who successfully refinanced their homes with a VA loan had an average FICO credit score of 715 and 12% equity.

Here's where to learn more about the three most common options for refinancing your home with the VA's help.

It wasn't supposed to be like this after the Federal Reserve stopped flooding the mortgage market with money last year.

Back in the fall of 2012 the nation's bank-for-banks began buying $85 billion worth of debt a month, a fairly even split between Treasury bills and bonds backed by thousands of home loans.

That pushed mortgage rates to record lows in an attempt to boost real estate sales and property values.

With the housing market improving, the Fed gradually reduced those bond purchases last year and ended them altogether in November.

Experts expected mortgage rates to rise by anywhere from a half point to as much as a full point.

But the demand for home loans fell precipitously in 2014.

Refinancings were off by 60%, and new loans to buy properties fell 15%. All in all, Americans took on less new mortgage debt than in any year since 1997.

The Fed's exit from the market just hasn't mattered. There's still plenty of money to fund all of the mortgages being written, and that's been reflected in lower interest rates — at least so far.

Although the Mortgage Bankers Association expects demand won't recover much over the next couple of years, it now projects the average cost of a 30-year fixed-rate loan will steadily rise to 4.6% by the end of the year and 5.4% by the end of 2016.