For some homeowners looking to save money over the course of their mortgages, it could be a great time to refinance. The average 30-year fixed-rate mortgage has dipped below the 4.0% mark, and by any historical measure, home loans remain incredibly cheap. If you can shave at least 1 percentage point from your primary mortgage rate by getting a new loan, then refinancing probably makes sense.
For many homeowners, the financial goal of a refi is often as simple as getting lower monthly payments over a new loan term. If your current home loan originated during a time of higher interest rates than today, and if your credit score has improved, chances are a refinance mortgage can save you money over the life of the loan.
As an example, let’s say you have a 30-year mortgage at 5.5% APR. You’re 15 years in, paying $1,520 in monthly mortgage payments with $118,000 remaining. Refinancing at today’s lower interest rates (let’s say 3.5% on a 15-year refinance) would reduce your monthly payment to around $850, a monthly savings of about $670, and save you around $120,000 in interest that you would have paid toward the original loan.
The best deal for most borrowers is usually the one that offers the lowest interest rate, with no points and lender fees of $2,000 or less.
Top 3 Ways to Refinance Your Home
1. Refinance with a Conventional Loan
Property values have increased in most parts of the country, boosting the amount of equity homeowners hold. 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.
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 3.68% in September. Borrowers who successfully refinanced their homes had an average FICO credit score of 741 and 36% equity.
2. Refinance with an FHA Loan
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 4.63%, according to Ellie Mae. (It’s the mortgage insurance FHA loans require, with significant up-front and monthly premiums, that ultimately make them more expensive.) Borrowers who successfully refinanced their homes with an FHA loan had an average FICO credit score of 662 and 21% equity.
3. Refinance with a VA loan
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. 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 rate on a VA loan 30-year fixed rate mortgage is 3.25%, or about a third of a point less than for conventional mortgages. Borrowers who successfully refinance their homes with a VA loan had an average FICO credit score of 699 and 10% equity.
If you’re going to refinance, you’ll need patience
A little more patience is the one thing you’ll need, whatever type of loan you decide to pursue. Lenders are now taking an average of 46 days to process refi applications. Before you decide on a lender, make sure you shop around for your the best deals out there.
With all the factors to consider, you don’t want to rush. You need to familiarize yourself with the terms and conditions of your current mortgage as well as those of the new loan. Your current loan may have a penalty for early payoff of the mortgage balance. Similar to your original mortgage, the new one won’t be free. The refinance loan will have origination fees, an application fee, an appraisal fee, and more. All costs need to be considered to ensure you don’t negate the savings you hope to achieve with the mortgage refinance.
National Average Mortgage Rates
|Type of loan||Current average||Record-low average||Established|
|30-year fixed rate||3.83%||3.50%||Dec. 5, 2012|
|15-year fixed rate||3.20%||2.75%||May 1, 2013|
|30-year fixed jumbo||3.77%||3.54%||Sept. 7, 2016|
|5/1 ARM||3.65%||2.63%||May 1, 2013|
Our refinancing calculator can help you evaluate any offer more precisely by showing how much your monthly payment will decrease and how long it will take to recoup any fees and closing costs.