2020 and 2021 ushered in a refinance boom, when homeowners took advantage of rock-bottom rates. Those days are behind us now as current mortgage rates continue to rise, with refinances making up a small share of loans today. These have been mostly cash-out refinances, in which a homeowner replaces their existing loan with a new, bigger mortgage that includes the balance of the first plus a portion of their home’s equity as cash.
Mortgage refinance rates have increased and are expected to continue to rise. Because of this, the refi window has closed for most borrowers, although with substantial equity, some might have an opportunity to benefit from a cash-out refinance or a home equity loan. Overall, refinancing will be a less attractive option as rates climb.
Home interest rate chart
Mortgage refinance industry insights
See Bankrate’s expert rate trend predictions.
How to refinance your mortgage in 5 steps
If you can get an adequately lower rate, refinancing can save you thousands of dollars a year, but it does require some work on your part. Here’s a quick guide:
1. Check your credit score
A better credit score will help you secure a better rate and make your refinance even more cost-effective. If you’re not happy with your credit score or the rates you’re being quoted, work on boosting your credit first, then try to refinance again once you’ve improved it. Typically, mortgage lenders want to see a credit score of 620 or better for a refinance, but there are some refinance options if you have poor credit, including streamline programs. You can improve your credit score by reducing your credit utilization ratio (the proportion of credit you’re using compared to your credit limit) and paying down your highest-interest or highest-payment debt.
2. Calculate the cost vs. savings of refinancing
One of the most important factors in refinancing is figuring out your break-even timeline. A refi usually comes with upfront costs at the closing, just like an initial mortgage, and those can be thousands of dollars or more. If you’re not planning to stay in your current home for more than a few years, the savings you get from a lower rate might not outweigh those costs before you move. Bankrate’s refinance breakeven calculator can help you figure out this timeline.
3. Find the best refinance rates today
It’s just as important to shop around when you refinance as it was when you applied for your first mortgage. Explore refinance offers from at least three mortgage lenders (your bank or current lender might be good places to start), and keep an eye on rates while you comparison-shop — this can help you decide when to lock in a rate. Check out Bankrate’s lender reviews, as well, to help guide your decision.
Compare the best mortgage refinance lenders.
4. Get your paperwork in order
Once you’ve identified a lender, find out what paperwork you need in order to complete a refinance application. Your lender will want to review tax returns, pay stubs, W-2s and other proof of income, as well as documentation about any assets such as savings.
5. Prepare for closing on your mortgage refinance
Refinancing isn’t quite as hard as shopping for a house, but it still takes some time. While your loan is processing, don’t open new credit accounts or make other large purchases until the new mortgage closes. Doing so can derail your application.
Follow this guide to refinance your mortgage.
Why compare mortgage refinance rates?
Shopping around for quotes from multiple lenders is key for every mortgage applicant. When you shop, consider not just the interest rate you’re being quoted, but also all the other terms of the loan. Be sure to compare APRs, which include many additional costs of the mortgage not shown in the interest rate. Some institutions may have lower closing costs and fees than others, or your current bank or credit union may extend you a special offer. Don’t be afraid to walk away from your current lender when you refinance. If you can find a better deal elsewhere, go for it. Look at quotes from online and traditional banks. Consider using a mortgage broker, who will be able to provide rates from wholesale lenders.
Here’s how to get the best refinance rate.
- Why trust Bankrate’s mortgage ratesBankrate displays two sets of rate averages that are produced from two surveys we conduct: one daily (“overnight averages”) and the other weekly (“Bankrate Monitor averages”).For Bankrate’s overnight averages, APRs and rates are based on no existing relationship or automatic payments. To determine the Bankrate Monitor mortgage rate averages, Bankrate collects APRs and rates from the 10 largest banks and thrifts in 10 large U.S. markets based on no existing relationship or automatic payments.Our advertisers are leaders in the marketplace, and they compensate us in exchange for placement of their products or services when you click on certain links posted on our site. This allows us to bring you, at no charge, quality content, competitive rates and useful tools.Learn more about Bankrate’s rate averages, editorial guidelines and how we make money.
Pros and cons of refinancing
Refinancing can be a smart move, whether it helps you secure a lower rate or tap your home equity to fund a home renovation or other project through a cash-out deal.
Pros
- You can lock in a lower rate by refinancing, which should make your monthly payments lower and give you some money back in your budget.
- If your home’s value has risen, you might be able to stop paying private mortgage insurance (PMI), which will also lower your monthly expenses. PMI should end automatically once you get to at least 20 percent equity owned free and clear, but it’s usually a good time to consider a refinance once that happens, too.
- If you need money for renovations, a cash-out refi offers relatively cheap capital. It can make your monthly payments more expensive, but home improvements boost your equity value even more.
Cons
- Refinancing costs money. Closing costs can total 2 percent to 5 percent of the amount of the mortgage, which is why it’s so important to make sure you’ll recoup those costs before you move.
- If you refinance from a 30-year loan to another 30-year loan, you’ll extend your repayment period. A new loan restarts the repayment clock.
Weigh more pros and cons of refinancing.
Should you refinance your mortgage?
You should refinance if doing so will help you to save money, build equity or pay off your mortgage faster. For example, if interest rates have dropped since you closed your mortgage, you could do a rate-and-term refinance to obtain a lower rate. In addition to a lower rate, you could save by eliminating PMI, or tap your home’s equity via a cash-out refinance. Even if rates are low, however, it’s important to consider your future plans. If you expect to sell your home in the foreseeable future, for instance, it might not make sense to start over with a new loan.
Mortgage refinance FAQs
- What is a mortgage refinance?A refinance allows you to pay off your old loan and replace it with a new mortgage at a new term and a new rate. This can lower your monthly payments and potentially allow you to pay off your mortgage faster. The refinance process is similar to the process of applying for a mortgage to buy a home. You’ll need to meet the lender’s criteria around credit score and debt, as well have your home appraised. You’ll also need to pay closing costs, although these are typically significantly less than they are for a purchase loan.Understand how refinancing a mortgage works.
- What are the requirements for refinancing a mortgage?To refinance your existing loan, you’ll need to meet strict requirements, provide a bunch of paperwork and ensure you’ve built up enough equity in your home, especially if you want to take cash out. Here are some of the things your lender will likely want to see:
- Identification
- Pay stubs
- Tax returns
- Proof of assets, including bank statements and brokerage account statements
- Loan statements
- Are mortgage purchase rates different from refinance rates?The rates on refinances compared to purchase loans might vary somewhat, but overall, they’re comparable. You might notice slightly higher refinance rates when they’re in demand. Experts don’t recommend trying to time the market — in other words, waiting for rates to drop — as there are so many variables that can affect rates, making it difficult to accurately predict whether they’ll rise or fall.If you find a rate that will save you money, then it’s a good idea to lock it in so you don’t risk missing out if rates jump.
- What are the different types of refinancing?Rate-and-term refinanceWith a rate-and-term refinance, borrowers can reduce their interest rate, lower their monthly payments (by extending their loan or through that new rate, or both) or shorten their term (which usually raises monthly payments) in order to pay off the loan faster. A shorter loan term can also save you lots of money in interest.Cash-out refinanceA cash-out refinance allows you to tap your equity by refinancing your mortgage. Because you’re withdrawing cash from your home’s value, the new mortgage amount will be higher than your current loan. Lenders typically limit cash-out refinances to no more than 80 percent of your home’s value so that you still have some equity left in your home.Sometimes lenders will also charge higher interest rates because the loan amount is increasing. Between a larger mortgage and higher interest rate, make sure you run the numbers before you try to cash out.Cash-out refinances can meet many financial needs, such as financing home improvements, consolidating high-interest debt or paying for a child’s college education.Streamline refinanceA streamline refinance is a product for government-backed loans (either an FHA streamline, VA streamline or USDA streamline). The advantage of streamline refinancing is that there are minimal credit requirements and the loan processing is typically fast. A streamline refinance can also be less expensive than conventional refinancing. Some lenders offer streamline refinances with no upfront costs wherein the lender will pay some or all of the closing costs in exchange for a higher interest rate.Learn more about the types of refinancing.
- How much does refinancing cost?Closing costs for refinancing your mortgage can run thousands of dollars, usually between 2 percent and 5 percent of the loan amount. These costs also vary by where you live and the lender you choose.
- Is it worth it to refinance your mortgage?Not many homeowners have an opportunity to refinance to a lower rate in today’s rising-rate environment, but it can still be worth doing for other reasons. In general, you’ll save money with a mortgage refinance if you can shave 1 percentage point or more off your current mortgage rate. Figure that to get the best rate, you’ll also need to have a credit score of 740 or higher and have enough equity in your home (at least 20 percent) to avoid the cost of PMI.Here’s a quick look at why people refinance their mortgage:
- Saving money on interest costs by lowering your monthly payment and or the term (number of years) you pay the loan
- Getting rid of an adjustable-rate loan, which have less stable monthly payments as rates rise and fall
- Raising cash to pay for home improvements or fund college for your kids
- Taking advantage of a lower rate if your credit has improved since you first took out your loan
Additional refinancing resources
Written by: Jeff Ostrowski, Senior Mortgage Reporter for Bankrate
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Reviewed by: Greg McBride, Chief Financial Analyst for Bankrate
Greg McBride, CFA, is Senior Vice President, Chief Financial Analyst, for Bankrate.com. He leads a team responsible for researching financial products, providing analysis, and advice on personal finance to a vast consumer audience.