If you own a home, you probably see a lot of advertisements or get mail about refinancing your mortgage. Refinancing your home loan can help you save money, lower your interest rate, or convert an adjustable-rate mortgage to a fixed-rate mortgage.
To get the best deal on your refinance, you need to compare offers from multiple lenders. Read on to learn how to evaluate these offers and select the option that best fits your needs.
How to Compare Mortgage Refinance Offers
When you apply for any type of loan, whether it’s a mortgage, car loan, or personal loan, you should take the time to comparison-shop. If you look at multiple loan offers, you’ll usually find a better deal.
1. Check Your Credit Score
The first thing to do when you’re thinking about refinancing your loan is check your credit score. Credit scores are one of the first things that a lender will look at when a borrower submits a loan application.
The better your credit score, the better your odds of getting approved for a loan. A good credit score also gives you more loan options to choose from and may help you secure a lower interest rate on the loan you eventually chose. And that’s likely to save you some money in the long run.
If you have a poor credit score, the loans you qualify for might involve higher upfront fees and a higher interest rate than your existing loan. That could defeat the purpose of refinancing.
It’s easy to check your credit report for free. If you find errors on your report, work with the reporting credit bureau to remove them. And if you find your credit isn’t as strong as you thought, table the idea of refinancing for the time being and work on boosting your FICO score.
2. Consider Your Goals for Refinancing
Before you apply for a new mortgage loan, think about your goals for refinancing. Your reason for refinancing will make a huge difference in the loan you choose.
For example, if you want to lower your monthly payment, you wouldn’t want to refinance to a loan with a shorter term. If you want a lower mortgage interest rate, you wouldn’t choose a loan with a higher rate.
Let’s take a look at some of the most common reasons you might want to refinance your mortgage.
Lower Monthly Payments
Refinancing your mortgage can help you reduce your monthly payment, giving you more flexibility in your budget. Extending the term of the loan or reducing its interest rate are two ways to do this.
Lower Interest Rate
If rates have decreased or your credit has improved since you got your current loan, refinancing your mortgage can help you reduce your interest rate, which will save you money in the long run.
If your down payment for your current mortgage was less than 20%, you likely have to pay for private mortgage insurance (PMI). If your current loan-to-value ratio has risen above 20% due to your loan payments or increasing home values, refinancing can help you get out of paying PMI.
Cash Out Home Equity
If you’ve built a lot of equity in your home and want to use it for something else, like home improvement or investing, use a cash-out refinance to turn your home equity into money you can spend.
Adjust the Loan Term
Refinancing your mortgage lets you reset its term. You can extend the loan’s term or shorten it based on your financial goals.
Add or Remove a Co-Borrower
If you want to add a co-borrower or remove someone from a loan, the easiest way to do so is likely to refinance your loan. For example, you might refinance to remove an ex-spouse from your loan.
Convert an Adjustable Rate to a Fixed Rate or Vice Versa
Refinancing is an opportunity to switch from an adjustable rate to a fixed rate or vice versa, reversing the choice you made when you got your original mortgage.
Switching from an adjustable-rate mortgage to a fixed-rate mortgage prevents a potential interest rate spike after the adjustable-rate loan’s rate lock period ends. Meanwhile, converting to an adjustable-rate mortgage could temporarily lower your rate — as long as you plan to sell during the rate lock period.
3. Compare Mortgage Lenders
Once you’ve made sure your credit is in good shape, take a look at a few different lenders. You can consider lenders in your local area like banks and credit unions as well as online lenders.
To find the best mortgage for your needs, look for a lender that is advertising the type of loan you want.
Do you need an FHA loan? Make sure the lender offers that type of mortgage. If you have an expensive home, you’ll want to make sure the lender offers jumbo loans.
You can also do some preliminary comparison of the loan terms, such as the annual percentage rate the lenders are advertising for their loans.
4. Request Quotes From Multiple Lenders
Once you’ve settled on a few lenders that you’re interested in working with, ask each of those lenders for a quote.
As part of providing the quote, the lender will probably ask you for some basic information, such as the loan amount that you’ll need, your annual income, the amount of home equity you’ve built, and so on.
Based on the information you provide, each lender will give you a sample mortgage loan offer. This will include things like the interest rate, fees, and monthly payment for the new mortgage they are offering.
One of the best ways to do this is to use an online loan broker or quote website like LendingTree. These sites take your information and search for lenders that work with people like you. You can get a quick look at offers from multiple lenders this way.
If you only get a couple of quotes from these sites, you can then move on to approaching lenders on your own.
Keep in mind that these sites make money by referring you to lenders, so they’ll give your contact info to lenders. You’re likely to start getting calls and emails after requesting quotes, so be prepared for that.
5. Compare Loan Estimate Terms
After you get loan estimates from each lender, sit down and compare them to find the best deal and to make sure that the terms of the new loans beat the terms of your current mortgage.
The important things to look at include:
The interest rate of the loan determines how quickly interest accrues. The lower the rate, the lower your monthly payment and the overall cost of the loan because less total interest will accrue over the life of the loan.
Mortgage points are paid upfront when you close on the loan. Points are a type of prepaid interest and each point you pay usually reduces the rate of your mortgage by 0.25%. Paying points can save you money in the long run if you plan to stay in your home for a long time.
You’ll have to pay various fees as part of getting a new mortgage, including underwriting fees, home appraisal fees, application fees, and origination fees. The higher the fees charged, the more expensive it will be to refinance your loan.
The term of a mortgage is the amount of time it will take to repay the loan if you follow the minimum payment schedule. The most common terms are 15 years and 30 years. A 30-year mortgage will have a lower monthly mortgage payment while a 15-year loan will cost less overall. Which you choose depends on your refinancing goals.
Interest Rate Type
When you get a mortgage, you can choose from an adjustable-rate loan or a fixed-rate loan. Fixed-rate mortgages have steady interest rates which offer predictability over the life of the loan. Adjustable-rate mortgages usually have lower initial interest rates, but rates could rise in the future, increasing the cost of the loan and its monthly payment.
Closing costs are all of the costs you have to pay to get your new mortgage, including things like mortgage points and fees. You want to make sure that you can afford any closing costs your refinance lenders will charge.
Mortgage Refinancing FAQs
Mortgages and refinancing can be complicated. Make sure you understand the process and why you might want to refinance before starting the process.
Should I Refinance My Mortgage?
Whether you should refinance your mortgage depends on your personal financial situation and your goals for refinancing.
You shouldn’t refinance just for the sake of refinancing. In most cases, refinancing only makes sense if it saves you money over the life of the loan, lowers your monthly payment, or helps you get out of debt faster. You’ll have to run the numbers to see if any of these situations apply to you.
How Much Money Can I Save by Refinancing?
Depending on the interest rate of your old loan and whether you’re paying PMI, refinancing could save you a lot of money.
Imagine you have a mortgage with a $250,000 balance and fifteen years remaining in its term. The interest rate of that loan is 4%. Your monthly payment before taxes will be $1,849 and you can expect to pay $332,820 over the remaining life of the loan.
Refinancing to a 15-year loan at 3% interest will drop your monthly payment by more than $100 to $1,726. Over the life of your new loan, you’ll spend $310,680, saving you $22,140 overall. If the closing costs and other fees are less than that amount, refinancing means saving money and adding flexibility to your monthly budget.
Does Refinancing Remove Private Mortgage Insurance (PMI)?
If you’re able to eliminate PMI from your loan payment, you can save even more. According to a study from the Urban Institute, the average loan that includes PMI had a principal balance of $289,700 in 2020. The Urban Institute reports that PMI averages between 0.22% and 2.25% of your loan’s value. Even if you’re on the lower end of that range and paying 1%, refinancing to eliminate PMI can save you almost $2,900 per year on an average loan.
For conventional loans, you can remove PMI by refinancing to a loan with a loan-to-value ratio of 80% or less, meaning you have at least 20% equity in your home. That equity can come from paying down your original loan’s balance or due to appreciation in your home’s value.
Unfortunately, mortgage insurance is difficult to avoid on some types of mortgages, includinge Federal Housing Administration loans. Depending on when the loan originated, mortgage insurance can be permanent or fixed for 11 years regardless of the equity you build.
The only way to get out of these payments when you refinance is to refinance to a conventional loan. If you refinance to another FHA loan, you still have to pay for mortgage insurance.
Can I Refinance if I’m Underwater on My Mortgage?
If you wind up underwater on your mortgage, meaning you owe more than your home is worth, it can make refinancing more difficult. Many lenders require that you have some equity in your home before refinancing.
However, there are some lenders that will let you refinance, especially if you can put some extra cash toward the loan balance to get out of being underwater.
In the past, the federal government has offered special refinance programs for borrowers with government-secured loans, such as the Enhanced Relief Refinance Mortgage program and HARP. Programs like these could appear once more in the future, though that’s not guaranteed.
Can I Refinance if I Have a Second Mortgage?
Some people wind up having multiple mortgages at one time. This can happen if you get a home equity loan or home equity line of credit on top of your current mortgage.
Refinancing with a second mortgage is possible, but can be more difficult than refinancing when you only have one loan.
One common solution is to refinance both loans into a single loan when you refinance. This has the added benefit of leaving you with just one monthly payment to make. It’s also relatively simple to refinance just your second mortgage.
Refinancing your primary loan is more complex. You need to work with both the new lender and the lender who provided your second mortgage and have the second mortgage lender agree to remain subordinate to the new loan. That means that the lender for your refinance loan has first priority to recover its losses in the event that you stop making payments.
If your second mortgage lender won’t agree to this, you won’t be able to refinance just your primary loan alone.
Can I Refinance More Than Once?
Yes, it’s possible to refinance your mortgage more than once. You can refinance as often makes sense for you financially so long as you can find willing lenders.
In reality, you don’t want to refinance your mortgage often. Refinancing incurs major costs, and the process can reduce your credit score in the short term, potentially impacting your ability to qualify for other loans or credit lines.
What Information Do I Need to Provide to a Mortgage Broker?
One option if you’re looking to refinance is to work with a mortgage broker. Mortgage brokers are middlemen who look at your financial situation and try to match you with lenders that will best help you meet your financial goals. This saves you the effort of having to research dozens of lenders to find the best deals.
Your mortgage broker will need much of the same information you’d need to provide to a lender, including:
- Proof of Income. Bring your two most recent pay stubs and information about any other income you have so the broker can confirm your annual income, which can affect your ability to qualify for loans.
- A List of Bank and Loan Accounts. This shows your broker and would-be lenders how much cash you have on hand and your current liabilities. Lenders want to know that you have enough in the bank to deal with upfront refinancing costs. They also need to know your debt-to-income ratio, a key measure of your ability to afford your loan.
- Details About Your Home and Current Mortgage. Bring your most recent mortgage statement so the broker can see your remaining balance, interest rate, monthly payment, and other details.
- Your Goals for Refinancing. Make sure to explain why you’re refinancing, such as to lower your monthly payment or to convert an adjustable-rate loan to a fixed-rate loan. This helps guide the broker as they look for the best loan for you.
There are many reasons to refinance your mortgage, but most involve saving money — either by lowering your monthly payment or reducing the total cost of the loan. Understanding why you’re refinancing and knowing how to effectively compare loan offers from mortgage refinance lenders increases the odds that you’ll choose the loan that’s the best choice for your personal financial situation.