How to refinance a home loan (2023)

How to refinance a home loan (1)

If you need cash to pay for home improvements, repairs or other expenses, it might make sense to take out a home equity loan. You may be wondering if you can refinance your home loan debt to get a lower interest rate or change your payment terms. The short answer is yes, it is possible to refinance a home loan, but you have to meet a few conditions to qualify.

talk to your financial advisorcan help you decide if refinancing with a home loan makes sense.

Understanding home loan refinancing

the mortgageEquity value that allows you to use cash. A home loan is a form of second mortgage where you pay interest on top of the primary mortgage. Home loans usually have a fixed amountinterestThe repayment term can be up to 30 years.

refinancingA home loan is when you take out a new loan to pay off an old loan. You will then make payments on the new loan according to the terms set by the lender. You are still responsible for paying your primary mortgage.

Reasons for mortgage refinancing

Refinancing a home loan or any type of mortgage can make sense in several situations:

  • Changing rates.First, you may be able to refinance if it gets you a lower interest rate. A lower interest rate can save you money on your loan or can result in lower monthly payments.
  • Get different loan terms.Let's say, for example, that your original home loan was for 20 years, but you want to extend it. You can refinance it into a loan for 30 years. You can also go the other way and refinance a longer loan into a shorter term, although this may mean higher monthly payments.
  • Change of loan type.if you have itVariable rate home loans that you can refinance with a fixed rate.This gives you some predictability in your payments because you don't have to worry about interest rate fluctuations affecting your payments.
  • Get more capital.If your home equity has increased since you took out your home loan, you can refinance it to get more cash. Remember that this means you will have to pay off more mortgage debt.

Advantages of refinancing a home loan

How to refinance a home loan (2)

Home loan refinancing can have several advantages for homeowners. Here are the best experts who know about home loan refinancing.

  • Refinancing your home loan can save you money if you can get a lower interest rate.
  • You can reduce your monthly payment by lowering the interest rate or changing the terms of the loan.
  • Choosing a shorter repayment term can help you pay off your home loan faster, freeing up funds for other financial goals.

It helps to understand what you can expect from a home loan refinance before you make the decision. It can also help you decide which loan terms make the most sense.

Disadvantages of mortgage refinancing

While there are some good reasons to refinance your home loan balance, there are also some disadvantages that you should be aware of.

  • Refinancing can save you interest, but you're actually just not paying off your debt.
  • Your lender may expect you to pay closing costs for the refinance loan, and there may be prepayment penalties if you decide to pay it off early.
  • If you don't have enough equity or don't meet the lender's minimum requirements, it can be difficult to qualify for a home loan refinancecredit scoreand income requirements.

It's important to note that even if you get a lower interest rate, refinancing to a longer term loan probably won't save you much money. The longer you pay the loan, the more you pay in total interest.

useOnline mortgage refinancing calculatorIt can help you estimate savings under different loan terms.

How to refinance a home loan

How to refinance a home loan (3)

If you want to refinance your home loan, the first step is to calculate how much equity you have in the property to determine how much you can borrow. Lenders will look at your loan-to-value (LTV) ratio, which is the amount of the loan divided by the value of the property. In general, aGood LTV for refinancing a mortgage80% or less.

Once you're done, you can move on to the next stage, which includes:

  • Shop around to find the right lender to work with.
  • Apply for a refinancing loan and attach the necessary documents
  • Full appraisal if lender requires.
  • Review your credit information to make sure you understand it.
  • Close the loan and pay all fees.

When comparing lenders, it's helpful to look at the minimum requirements to qualify for a home loan refinance, including LTV and credit rating requirements. It's also a good idea to check the costs. For example, do you pay the closing costs out of pocket or are they applied to the loan? If you pay off your refinance loan early, will you be subject to a prepayment penalty?

In terms of documentation, lenders will likely ask for the same things they need to get a first mortgage. This list may include tax returns, W-2s, bank statements, and investment account statements. The more documents proving your ability to pay, the better.

If your lender allows you to roll closing costs into a refinance loan, consider the pros and cons before committing. First, you don't have to pay yourself to go through the refinancing process. But since they're included in the loan, you'll still pay those closing costs and pay interest over time.

The bottom line

If you're ready to change your existing loan or want to get more equity out of your home, consider refinancing a home loan. Estimating the costs and potential long-term savings is a good place to start. Remember, of course, that your new payment must fit within your budget, so you don't risk falling behind.

Tips for mortgage loans

  • Talking to your financial advisor can help when you're not sure whether a home loan refinance is ideal. Your advisor can help you evaluate the pros and cons of refinancing and what terms might be best. Finding a financial advisor doesn't have to be difficult. SmartAssetfree toolsBy matching you with up to three approved financial advisors serving your area, you can interview your advisor for free to find out which one is right for you. If you're ready to find an advisor who can help you reach your financial goals,Start now.
  • Your bank may offer a home loan refinancing option, but you should consider itonline lenderinstead of that. Network lenders may offer lower home loan refinancing rates, charge fewer fees, or close the loan in less time. You can also get pre-approved for a refinance loan online without affecting your credit. But remember that if you decide to apply for a full loan, a thorough credit check may be required.

Image credits: ©, ©, © Tita

Rebecca Lake, CEPF®Rebecca Lake is a retirement, investment and estate planning expert who has been writing about personal finance for a decade. Her financing expertise also extends to home buying, credit cards, banking and small businesses. She has worked directly with several major financial and insurance brands, including Citibank, Discover and AIG, and her articles have appeared online in the US. News & World Report, and Investopedia. A graduate of the University of South Carolina, Rebecca also attended Charleston Southern University as a student. Originally from central Virginia, she now lives on the North Carolina coast with her two children.


What do I need to do to refinance my house? ›

What do you need to refinance your home? Depending on your loan type and lender, you'll likely need to meet the following refinance requirements: a current mortgage loan in good standing, enough home equity, a qualifying credit score, a moderate debt-to-income ratio, and enough cash to cover the costs of refinancing.

How long after buying a house should I refinance? ›

Conventional loans – you can do a rate-and-term refinance right away if you want, but typically not with the same lender. That's because, before 6-months, the lender may lose their original commission. On the other hand, if you want a cash-out to refinance, you'll have to wait for at least 6-months.

Is it hard to refinance a mortgage? ›

The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. It can be hard to predict how long your refinance will take, but the typical timeline is 30 – 45 days.

How much money do you have to have to refinance a house? ›

A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you'll likely need 20% equity in your home. This number is often the amount of equity you'll need if you want to do a cash-out refinance, too.

Does refinance hurt credit score? ›

In conclusion. Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months ...

Do you have to go to a closing for a refinance? ›

If a figure doesn't match the Closing Disclosure, or you're anxious about the refinance, you can decide not to go through with closing. Though you won't have to commit to the terms of the new loan, you will owe costs for services already performed, such as a credit report or home appraisal.

Why would you refinance your house? ›

Why Should I Refinance My Mortgage? Refinancing can allow you to change the terms of your mortgage to secure a lower monthly payment, switch your loan terms, consolidate debt or even take some cash from your home's equity to put toward bills or renovations.

What is the current interest rate? ›

Current mortgage and refinance interest rates
ProductInterest RateAPR
20-Year Fixed Rate7.08%7.11%
15-Year Fixed Rate6.41%6.44%
10-Year Fixed Rate6.48%6.51%
5-1 ARM5.83%7.46%
5 more rows

Will mortgage rates go down 2023? ›

“A fight over raising the debt ceiling is likely to drag into the summer, and mortgage borrowers should expect rate volatility as a result.” Mortgage Bankers Association (MBA). “Long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.2%.”

What credit score do you need for a home refinance? ›

In general, you'll need a credit score of 620 or higher for a conventional mortgage refinance. Certain government programs require a credit score of 580, however, or have no minimum at all.

How much equity do you need to refinance? ›

The 20 Percent Equity Rule

When it comes to refinancing, a general rule of thumb is that you should have at least a 20 percent equity in the property. However, if your equity is less than 20 percent, and if you have a good credit rating, you may be able to refinance anyway.

What is the monthly payment on a $100 000 home equity loan? ›

Loan payment example: on a $100,000 loan for 180 months at 7.30% interest rate, monthly principal and interest payments would be $915.68 over the full term of the loan. Payment example does not include amounts for taxes and insurance premiums.

Do you have to pay if you back out of a refinance? ›

If you refinance and then rescind the refinance loan, you will still have to pay the original loan. Tip: If you have the right to rescind, you can cancel your loan in the three-day window for any reason or no reason at all.

How much equity can I borrow from my home? ›

Typically, lenders allow you to borrow up to 80% of your home equity. So, if your equity is $150,000, you may be able to borrow up to $120,000. If your equity is $200,000, you may be able to borrow up to $160,000. The exact amount you're approved for depends on factors such as your credit score and income.

How much money can I take out for a refinance? ›

In general, lenders will let you draw out no more than 80% of your home's value, but this can vary from lender to lender and may depend on your specific circumstances. One big exception to the 80% rule is VA loans, which let you take out up to the full amount of your existing equity.

How long does the refinance process take? ›

A refinance typically takes 30 to 45 days to complete. However, no one will be able to tell you exactly how long yours will take. Appraisals, inspections and other services performed by third parties can delay the process.

What can hurt refinance? ›

The most common reason why refinance loan applications are denied is because the borrower has too much debt. Because lenders have to make a good-faith effort to ensure you can repay your loan, they typically have limits on what's called your debt-to-income (DTI) ratio.

How do you avoid closing costs when refinancing? ›

No-closing-cost refinances work best if you plan to stay in your home for less than 5 years. This allows you to avoid paying closing costs as a lump sum and you'll sell the home before you pay thousands more in interest over the life of the loan.

What not to do before closing on refinance? ›

5 Mistakes to Avoid When Closing on a Mortgage
  1. Opening a New Line of Credit.
  2. Making a Large Purchase on Your Credit Card.
  3. Quitting or Changing Your Job.
  4. Ignoring Your Closing Schedule.
  5. Forgetting to Pay Bills.
Jun 29, 2022

Can closing costs be negotiated on a refinance? ›

Negotiate with your lender. During a mortgage refinancing, it's certainly possible to negotiate with your lender. This is true when it comes to closing costs and it is especially true if you choose to refinance with your current lender.

What is the most common reason to refinance? ›

Lower your interest rate

Known as a “rate-and-term” refinance, this is the most popular reason borrowers refinance. Borrowers with a higher interest rate on their current loan could benefit from a refinance if the math pans out — especially if they're shortening their loan term.

Is refinancing a house a smart idea? ›

More specifically, refinancing makes sense if you can lower your interest rate by one-half to three-quarters of a percentage point, and if you plan to stay in your home long enough to recoup the closing costs that taking out the new mortgage incurs.

Does refinance mean more money? ›

Securing a lower interest rate through a refinance reduces your cost of borrowing so you'll pay less on your personal loan overall. Refinancing to a longer loan term offers lower minimum monthly payments. You will likely pay more toward the loan overall by extending the repayment timeline due to interest charges.

Who has the cheapest mortgage rates? ›

Lenders with the best mortgage rates:
  • Freedom Mortgage: 2.66%
  • Bank of America: 2.80%
  • Veterans United*: 2.86%
  • Better Mortgage: 2.86%
  • PennyMac: 2.87%
  • AmeriSave: 2.90%
  • Navy Federal Credit Union*: 2.93%
  • Home Point Financial: 2.94%
Aug 12, 2022

How high will interest rates go in 2023? ›

So far in 2023, the Fed raised rates 0.25 percentage points twice. If they hike rates at the May meeting, it is likely to be another 0.25% jump, meaning interest rates will have increased by 0.75% in 2023, up to 5.25%.

How much interest do you pay on a 30-year loan? ›

Rates are at or near record levels in 2021 with the average 30-year interest rate going for 3.12%.
Average 30-Year Fixed Mortgage Rate.
Credit ScoreInterest Rate
2 more rows

How long will interest rates stay high? ›

'I believe by the end of 2023 we will see rates start to fall with a target of between 2.5 to 3 per cent in 2024. 'I believe if the base rate can get back to circa 2.5 per cent, then we will see rates hovering around that mark with a return to products that have not been seen in the mortgage industry for some time. '

How low will mortgage rates go in 2024? ›

These organizations predict that mortgage rates will decline through the first quarter of 2024. Fannie Mae, Mortgage Bankers Association and National Association of Realtors expect mortgage rates to drop through the first quarter of 2024, by half a percentage point to about nine-tenths of a percentage point.

Where will mortgage rates be in spring 2023? ›

Mortgage rate trends by loan type
March 2023February 2023
Conforming Loan Rates6.40%6.68%
FHA Loan Rates6.37%6.49%
VA Loan Rates6.06%6.25%
Jumbo Loan Rates6.56%6.43%

What is the government cash out program? ›

The Department of Veterans Affairs (VA) Cash-Out Refinance Loan is for homeowners who want to trade equity for cash from their home. These loans can be used as strictly cash at closing, to payoff debt, make home improvements, and pay off liens.

How much can you borrow with a 700 credit score? ›

The average credit limit for those with a 700 credit score is right around $4,500. However, if you were to pull out a 700 credit score personal loan, you should be able to access more money than you would with just a credit card.

What credit score gets the best rates? ›

Good credit score = 680 – 739: Credit scores around 700 are considered the threshold to “good” credit. Lenders are comfortable with this FICO score range, and the decision to extend credit is much easier. Borrowers in this range will almost always be approved for a loan and will be offered lower interest rates.

Do you lose equity when refinancing? ›

In short, no, you won't lose equity when you refinance your home. Your home's equity will fluctuate based on how much repayment you've made toward your home loan and how the market affects your home's value.

What is the 80 20 rule in refinancing? ›

Conventional refinance

For conventional refinances (including cash-out refinances), you'll need at least 20 percent equity in your home to avoid PMI. This also means you need an LTV of no more than 80 percent.

How do you calculate if refinancing is worth it? ›

To calculate the value of refinancing your home, compare the monthly payment of your current loan to the proposed payment on the new loan. Then use an amortization schedule to compare the principal balance on your proposed loan after making the same number of payments you've currently made on your existing loan.

How much is a 200k mortgage per month? ›

On a $200,000, 30-year mortgage with a 4% fixed interest rate, your monthly payment would come out to $954.83 — not including taxes or insurance. But these can vary greatly depending on your insurance policy, loan type, down payment size, and more.

How much is a $800,000 mortgage payment per month? ›

Monthly payments on an $800,000 mortgage

At a 4.5% fixed interest rate, your monthly mortgage payment on a 25-year mortgage might total $4,427.78 a month, while a 15-year might cost roughly $6,102.94 a month.

What is the payment on a $300 000 mortgage? ›

On a $300,000 mortgage with a 3% APR, you'd pay $2,071.74 per month on a 15-year loan and $1,264.81 on a 30-year loan, not including escrow. Escrow costs vary depending on your home's location, insurer, and other details.

Why do you skip a payment when you refinance? ›

Why it appears you skip a mortgage payment when refinancing. At first glance, it can look like free money because you closed on June 12 but don't owe any money in July. That's because mortgage payments are made “in arrears,” or for the previous month.

Do you skip a month when you refinance? ›

You won't skip a monthly payment when you refinance, even though you might think you are. When you refinance, you typically don't make a mortgage payment on the first of the month immediately after closing. Your first payment is due the next month.

Is refinancing with cash out a good idea? ›

Cash-out refinancing can be a good idea for many people. Mortgage rates are on the rise. Still, the collateral involved in a cash-out refinance — your home — means that lenders take on relatively little risk and can afford to keep refinance rates affordable.

What is the cheapest way to get equity out of your house? ›

HELOCs are generally the cheapest type of loan because you pay interest only on what you actually borrow. There are also no closing costs. You just have to be sure that you can repay the entire balance by the time that the repayment period expires.

Can you borrow money against your house? ›

Similar to a HELOC, a home equity loan allows homeowners to borrow against the equity in their home. However, a home equity loan is a fixed amount of money paid out in one lump sum. Homeowners repay the loan in fixed installments over a predetermined period.

What is my equity in my house? ›

You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value. This includes your primary mortgage as well as any home equity loans or unpaid balances on home equity lines of credit.

Is it a good idea to take out equity? ›

A home equity loan could be a good idea if you use the funds to make home improvements or consolidate debt with a lower interest rate. However, a home equity loan is a bad idea if it will overburden your finances or only serves to shift debt around.

How to turn mortgage debt into cash? ›

A cash-out refinance is when you take out a new mortgage that'll pay off your existing home loan and leave you with a significant amount of money. The difference between what you owe on your old loan and what you borrow is yours to take as a lump sum in cash.


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