Mortgage Refinance Rates Explained
Refinancing a home loan could save you money and help streamline your monthly payments. The key is making sure you’re getting the best mortgage refinance rates.
Qualifying for the most favorable refinancing rates can hinge on your credit scores, income and how much you need to borrow. Getting familiar with some basic mortgage refinancing terminology and knowing how to do the math on refinance rates can help you decide if it’s the right move.
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Mortgage Refinance Terms to Know
Before digging into mortgage rates, here are a few terms that can be helpful to understand.
- Amortization. Amortization refers to how a refinance loan is repaid over time, with interest factored in. When you complete a mortgage refinance, your lender should provide you with an amortization schedule showing how each payment breaks down between principal and interest.
- Equity. Equity represents the difference between your home’s value and what you currently owe on the mortgage. It’s important to know how much equity you have if you’re considering a cash-out refinance.
- Cash-out refinance. A cash-out refinance occurs when you refinance your mortgage and receive a cash payment for your home’s equity value.
- Loan-to-value ratio. Loan-to-value ratio or LTV measures the amount of the mortgage against the property’s value. Lenders can impose LTV requirements you need to meet to qualify for a mortgage refinance.
- Break-even point. The break-even point represents the point in time when you recoup any money spent to refinance your mortgage in interest savings.
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How Mortgage Refinance Rates Work
A mortgage refinance rate is the interest rate you pay to get a mortgage finance loan. These rates tend to be higher than interest rates for purchase loans, as they often have a higher rate of default. That means more risk for lenders, hence the higher rates.
On a broad scale, mortgage refinance rates can be influenced by a number of things, including:
- Job growth and employment
- Trends in home sales
Unlike credit card or personal loan interest rates, mortgage interest rates aren’t tied to the federal funds rate.
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On a personal level, the interest rate you receive for a mortgage refinance rate can depend on:
- Credit scores
- Loan-to-value ratio
The type of refinance loan can also make a difference. For example, you may be offered a higher rate on a cash-out ref versus a standard refinance loan if the lender feels there’s a higher risk of default.
Mortgage Refinance Rate Myths
There are some common misconceptions that tend to make the rounds about mortgage refinancing and refinance rates. One of the biggest is that refinancing will always save you a lot of money.
The reality is that whether refinancing a home loan can save you money depends on the mortgage refinance rates you qualify for, how much you still owe on the home and how long you plan to remain in the property.
Here’s an example. Say you took out a $300,000 30-year home loan at 5.125%. You bought the home in 2010 and now you plan to refinance to a 20-year term. You qualify for a mortgage rate of 3.194%, which would drop your monthly payment from $1,633 to $1,342. You’d save $292 a month and $31,316 in interest.
Sounds good, right? Now, assume you qualify for a mortgage refinance rate of 4.5% instead. At this point, your monthly savings drops to $126. And your total interest savings is now just $4,544. It would take you five years to reach the break-even point, versus just one year if you’d been able to get the lower rate.
Running the numbers through a mortgage refinance calculator can help you compare refinance rates and decide if it’s the right move.
How to Get the Best Mortgage Refinance Rates
If you’re interested in refinancing, then it pays to get the lowest rates possible on a new home loan. To wrap things up, here are some helpful hacks and tips for securing the best refinance rates:
- Check your credit report for errors. Cleaning up your credit reports could add points to your score, helping you to qualify for better mortgage refinancing terms.
- Reduce consumer debt balances. If you have credit cards, student loans or other debts, consider paying some of them down to improve your debt-to-income and credit utilization ratios.
- Avoid a cash-out refi if possible. Cash-out refinancing can be more expensive rate-wise so only consider tapping your home equity if it’s a necessity.
- Do the math on refinance savings. If you haven’t tried a refinance calculator yet to estimate your savings, don’t skip that step. That can help you decide if refinancing is even worth it.
Finally, take time to compare mortgage refinance rates. It’s possible that an online lender may be able to offer better terms than a traditional bank or credit union.
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Rebecca Lake is a freelance writer specializing in personal finance,
credit and debt. She’s a contributor to U.S. News and World Report,
Forbes Advisor and The Balance and her work has appeared online at CreditCards.com,
Money-Rates.com and dozens of other top publications.