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Even if you’ve signed a loan agreement with a 30-year term, it doesn’t mean you’re stuck with it. Comparing refinance options from different lenders could help you save over the life of your loan. But while you might be able to leverage better market rates, your home’s equity or an improved credit score to replace your mortgage with a new one — timing is everything.
Refinancing is when you replace your mortgage with a new one with better rates and terms. You can refinance your loan under your current lender or start a new loan with a competing bank or nontraditional lender.
Often the main purpose of refinancing is to save on repayments. But you can also refinance to unlock equity in your property with products like cash-out refinances. A cash-out refinance replaces your existing mortgage with a loan amount that’s higher than what you owe — you’ll get the difference in cash.
Here are the five main types of refinancing you might want to consider:
While not a specific type of mortgage refinance, there’s also something called a no-closing-cost mortgage refinance. As the name suggests, you can either skip the closing costs with this option or the costs roll into your mortgage so you don’t have to pay them up front. But you may pay a higher rate or have bigger payments.
If you lock in a lower rate than what you’re paying now, you stand to save thousands. But because of closing costs and other fees, do the math to determine if refinancing is worth it.
Suppose you signed a 30-year $350,000 mortgage with an average variable rate of 4.3% — the ongoing rate at the time — you’d pay $1,732 on your loan monthly.
Now suppose that you’ve found a new lender willing to refinance your existing mortgage at today’s average rate of 3.54%. It’ll cost you 2% closing cost. Although you would need to pay $7,000 in fees, it would drop your monthly payments to $1,571.
| Loan Amount | Interest | Monthly Payment | Total Principal and Interest | |
|---|---|---|---|---|
| Current Mortgage | $350,000 | 4.30% | $1,732 | $623,520 |
| Refinance | $350,000 | 3.54% | $1,571 | $565,560 |
| Refinance Difference | $0 | 0.76% | $161 | $57,960 |
By refinancing, you’d save $161 a month — or around $50,000 ($57,960 – $7,000 = $50,960) over the lifetime of your 30-year loan, after deducting closing costs and fees.
How to calculate your refinance savings
A few things to consider when comparing lenders for your refinance are:
Learn whether refinancing can help save you money, cut down your repayment term or leverage equity in eight steps:
Learn more on how to refinance your mortgage
You’ll provide a lot of the same documentation necessary for your existing mortgage including:
Refinancing a mortgage can be expensive, requiring upfront costs to both your old and new lenders. Still, after factoring in the fees, you may still benefit from the lower rate or longer term your new mortgage offers.
Ask both lenders about fees that can include:
No-closing-cost refinance: Does it make sense?
Switching can save you money. You also stand to gain more by refinancing your mortgage:
You may be better off sticking with your current mortgage if:
Generally, your ability to deduct taxes won’t change with a refinanced loan. If you’re worried about taxes, speak to your accountant or a tax professional before refinancing.
Taxes become more complicated with specific types of refinancing, like a cash-out refinance. Refinancing can also reduce your total tax deductions, depending on how much it saves you.
No matter how happy you are with your mortgage, you could benefit from lower rates or better terms. Changing market rates, built-up equity and improved credit are all opportunities to refinance for a lower rate or better terms. Once the savings start rolling in, start your search for your next mortgage.
How do I refinance my mortgage if I have bad credit?
That depends on the lender and your score. Some lenders will refinance borrowers with bad credit, though you might pay higher interest rates and fees. Know your overall creditworthiness before applying to refinance with a lender.
When is it worth refinancing a small loan amount?
If you’re refinancing, say, a $75,000 mortgage, the monthly savings may not be worth the increased interest you’ll pay over time.
Is it better to refinance to a fixed or adjustable rate?
It depends on your financial goals. A fixed interest rate can keep your repayments low if you think interest rates will rise significantly. An adjustable-rate mortgage moves with the market, which means it could be helpful if you think interest rates will drop.
What will I need to refinance my loan?
In most cases your potential bank will want an up-to-date idea of your property’s value, including an appraisal. With savvy negotiating, you may be able to get your new lender to agree to waive any fees associated with your appraisal. Read more in our guide on how to prepare for a refinance home appraisal.
How do I refinance without equity?
That can be tough. If you haven’t gained equity with your existing mortgage, it may be difficult to find a new loan because of the high loan-to-value ratio. Talk with a mortgage expert about your options, or wait until you’ve gained enough equity to refinance.
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