How To Refinance Your Mortgage
These tips can help you start the refinancing process.
Determine your refinancing goal
Ask yourself what you want to achieve by refinancing. It could be reducing your current interest rate, changing the term of your loan, switching from an adjustable-rate mortgage to a fixed-rate loan or cashing out the equity youve built up. Defining a goal helps you narrow down what type of loan best suits your needs.
Consider how the loan term may change
Refinancing may extend or reduce the amount of time youll be paying the mortgage. For example, if you have already paid 10 years of your current 30-year mortgage and refinance into another 30-year loan, you will be paying your mortgage for a total of 40 years. If you refinance into a 15-year loan, your total payback time is cut to 25 years.
Shop around for a lender
Look beyond your current lender. Mortgage rates are very variable, and you may be able to find a lower rate by looking at multiple lenders. Consider banks, credit unions and online lenders.
Compare what they offer, then apply to 3-5 lenders that offer the best rate and terms. Your credit score wont be negatively impacted if you make multiple applications within a 14-day period. If possible, obtain a mortgage preapproval letter from several different lenders and compare the offers.
Calculate your breakeven point
Prepare your home for an appraisal
Lock in your rate
Usaa Va Mortgage Rates
USAA is a mortgage lender that offers both fixed-rate and adjustable-rate VA loans. Their fixed-rate loans have terms of 15, 20, 25, and 30 years, and their adjustable-rate loans have terms of 5, 7, and 10 years. Rates for both loan types are very competitive, and USAA offers a number of discounts and perks for their VA customers, including a 0.25% interest rate reduction for setting up automatic payments and a $200 closing cost credit for borrowers who close their loan within 60 days.
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We’ll do our best to meet or beat your current mortgage offer from another lender.footnote2 Even if you’ve already applied elsewhere, we may be able to reimburse you up to $750 for closing costs when your new Bank of the West mortgage closes.
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Our relationship pricing discounts for current Bank of the West and BWIS customers start at 0.125% if you have $100,000 or more in eligible deposits and rising to 0.75% with $3 million or more in deposits.footnote3
Get a 0.125% discount for setting up autopayfootnote4
Simply have your monthly mortgage payment automatically deducted from a Bank of the West savings or checking account.
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What Is A Good Mortgage Refinancing Rate
A good mortgage refinancing rate is one thats much lower than your current one most experts recommend at least one 1% lower, though if you can reduce it by at least 2%, thats where youll see the most savings.
Lenders will also consider your individual financial situation when determining your mortgage refinancing rate. Factors include your credit score, debt-to-income ratio, and the amount of home equity you have. Its also important to shop around with multiple refinance lenders to ensure youre getting the best rate.
Can You Refinance Your Mortgage To Consolidate Debt
Homeowners also refinance their mortgage for reasons other than getting a lower mortgage rate. A common reason is to borrow more money in order to pay off other debt or to consolidate higher-interest debt, which might even include second mortgages. To see whether a mortgage refinance makes sense, you will need to compare the cost of refinancing versus the cost of other loans that you could use instead.
Lets consider a $500,000 mortgage on a $1 million home that currently has a mortgage rate of 3%. Your lender is also offering a mortgage refinance rate of 3%. You currently have $50,000 in credit card debt that has an interest rate of 20%, $100,000 in apersonal loanat an interest rate of 7%, and a $50,000car loanwith acar loan interest rateof 5%.
With a mortgage refinance, you can borrow an additional $300,000 at an interest rate of 3%. Thats more than enough to cover your other $200,000 of debt that all have a higher interest rate. If you were to not refinance your mortgage and continued to keep these other debts as-is, you will be paying:
$100,000 at 7% per year will be $7,000 interest paid in one year
$50,000 at 5% per year will be $2,500 interest paid in one year
Combined, you will be paying $19,500 just for the interest from these debts in one year. How much can you save if you refinance to pay off these debts?
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Other Influences On Mortgage Rates This Week
Remarks by these Fed speakers may prove the most influential drivers of changes in mortgage rates this week. But there are some economic reports that could also move those rates.
And most of those land tomorrow. That day, well get retail sales, the producer price index and industrial production, all for December.
Whether this turns out to be a bumpy week for mortgage rates will depend on what the Fed speakers and those economic reports actually say. But it might be worth strapping in, just in case.
Va 30 Year Fixed Mortgage Rates
Since VA loans are guaranteed by the government, VA loans provide access to special benefits, including:
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When Should You Refinance Your Mortgage
When you should refinance is more a matter of your personal financial situation than trying to time it perfectly.
Dont try to time the market. Waiting on rate swings is as troublesome as timing the stock market. If you can save money or move closer to your financial goals by refinancing today, dont wait to see what happens with mortgage interest rates tomorrow.
Consider these key points when deciding whether to refinance your mortgage:
Your credit score
With most mortgage lenders, youll need a of at least 620 to qualify for a mortgage refinance. To get the lowest mortgage rate, youll need a 740.
Also keep in mind that, if your credit is lower than it was when you took out your current mortgage, you may not qualify for as favorable a rate as you did before.
Your credit report
Your credit score is based on information contained in your credit report. If there are errors in the report, it could cause a lender to offer a higher interest rate. Request a copy of your credit report, check it for mistakes and take steps to correct it.
Your debt-to-income ratio
Your debt-to-income ratio is the percentage of your gross monthly income that is used to pay your monthly debts. Lenders use your DTI to determine your credit risk.
For conventional loans, some lenders will work with a DTI as high as 43%. FHA loans will go a little higher, usually accepting DTIs of 50%. Lower, however, is generally better.
How long youre staying
How much equity you have in your home
Shop Around For The Lowest Fees
Dont only focus on the interest rate when shopping around. You should also pay attention to fees youll pay, which are factored into the annual percentage rate . A loans APR also takes into account certain loan fees, so one loan could have a lower interest rate, but have a higher APR. You can easily compare closing costs and fees by reading the Loan Estimate your lender provides after you apply.
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How Is My Mortgage Interest Rate Determined
Lenders determine your mortgage interest rate based on the type of loan you take out, your credit score, and the overall loan amount, as well as your down payment amount and the length of the loan.
- Loan Type: Government-backed loans are handled differently than conventional loans.
- : People with high credit scores generally receive lower interest rates. Although those with lower credit scores may still qualify, their mortgage terms may not be as favorable.
- Loan Amount: Your mortgage rate will be influenced by the total amount of money you need to borrow. Higher amounts tend to suggest higher interest rates.
- Down Payment Amount: A higher down payment can significantly lower your interest rate.
- Length of Loan: Long-term loans tend to bring lower monthly payments with higher interest rates, while short-term loans bring higher monthly payments and lower interest rates.
Current 30 Year Mortgage Refinance Rate Eases
The average 30-year fixed-refinance rate is 6.48 percent, down 22 basis points compared with a week ago. A month ago, the average rate on a 30-year fixed refinance was higher, at 6.67 percent.
At the current average rate, you’ll pay $630.75 per month in principal and interest for every $100,000 you borrow. That represents a decline of $14.53 over what it would have been last week.
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How Do Fed Rate Hikes Affect Mortgages
The Fed has been increasing the federal funds rate to try to slow economic growth and get inflation under control.
Mortgage rates aren’t directly impacted by changes to the federal funds rate, but they often trend up or down ahead of Fed policy moves. This is because mortgage rates change based on investor demand for mortgage-backed securities, and this demand is often impacted by how investors expect Fed hikes to affect the broader economy.
As inflation starts to come down, mortgage rates should, too. But the Fed has indicated that it’s watching for sustained signs of slowing inflation, and it’s not going to lower rates again any time soon though it has started opting for smaller hikes, starting with its 50-basis-point in December.
Mortgage Refinance Demand Surges As Homeowners Take Advantage Of Lower Interest Rates
- The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased last week to 6.42% from 6.58%.
- The drop in rates sparked a 5% increase in applications to refinance a home loan.
After rising at the end of the year, mortgage rates dropped sharply last week. That drove demand from current homeowners hoping to save on their monthly payments, but it did little to excite potential homebuyers.
As a result, total mortgage application volume rose just 1.2% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased last week to 6.42% from 6.58%, with points remaining at 0.73 for loans with a 20% down payment. One year ago, that rate was 3.52%.
“Mortgage rates declined last week as markets reacted to data showing a weakening economy and slowing wage growth. All loan types in the survey saw a decline in rates,” said Joel Kan, an MBA economist.
Mortgage applications to purchase a home fell 1% for the week and were 44% lower than the same week one year ago. That was the lowest reading since 2014. Buyers today are not only contending with higher interest rates but falling supply. They are also seeing prices come down and may be waiting to see how low they go.
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Why Are Mortgage Refinance Rates Higher Than Home Purchase Rates
Like scores of homeowners, when mortgage refinance rates began to fall in 2020, we refinanced our mortgage. We were excited to snag a 3.25% APR. However, if we had originated a new loan rather than refinancing our existing mortgage, our APR would have been 2.90%. Of all the mortgage lenders I checked today, only one offered the same rate to borrowers whether they were buying a new home or refinancing. I looked around and realized that most lenders offer higher rates to customers who refinance than to those taking out a new mortgage and wondered why. Here’s what I learned.
Qualifying For A 30 Year Fixed Mortgage
Those applying for a 30 year or 15 year fixed mortgage will first be required to be preapproved.
Why you should have a credit preapproval:
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Finding The Best Refinance Rate
Getting a great deal on a home mortgage refinance depends largely on the refinance rate you get. The conventional wisdom goes that its not worth refinancing if you cant get a rate thats at least 1% lower than your current mortgage rate. And its not just because refinancing involves hassle and paperwork. Refinancing a mortgage costs money, too, so you want to make sure that you at least break even on the transaction. But before we get into the weeds, lets go over the basics of how a refinance works.
A Rate And Term Refinance Sounds The Least Risky Doesnt It
Now, a rate and term refinance should result in the least amount of default risk because the borrower is likely reducing their monthly payment in the process.
This happens via a lower interest rate and possibly a lower outstanding balance spread out over a brand-new loan term.
That leaves us with home purchase loans, which youd think would be less risky than a cash out refinance, but not as risky as a rate and term refinance, since its ostensibly a first-time home buyer or someone in a new property.
If you were the bank, youd probably want to give a new, cheaper loan to the seasoned homeowner who has been paying their mortgage for years as opposed to the first-time buyer or even a move-up buyer taking on more debt.
But for one reason or another, some banks and mortgage lenders offer the lowest mortgage rates on home purchase transactions.
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What Are The Current Average Mortgage Refinancing Rates
Average mortgage refinancing rates are similar to what youll find for mortgage purchase rates: around 2.9% for a 30-year term. Keep in mind that the average rates may not reflect quotes youll receive from lenders, which depend on individual factors such as your credit score, debt-to-income ratio, and your home equity.
/1 Arm Moves Upward +001%
The average rate on a 5/1 adjustable rate mortgage is 5.51 percent, climbing 1 basis point over the last week.
Adjustable-rate mortgages, or ARMs, are mortgage terms that come with a floating interest rate. To put it another way, the interest rate can change periodically throughout the life of the loan, unlike fixed-rate mortgages. These types of loans are best for people who expect to refinance or sell before the first or second adjustment. Rates could be substantially higher when the loan first adjusts, and thereafter.
While borrowers shunned ARMs during the pandemic days of super-low rates, this type of loan has made a comeback as mortgage rates have risen.
Monthly payments on a 5/1 ARM at 5.51 percent would cost about $568 for each $100,000 borrowed over the initial five years, but could climb hundreds of dollars higher afterward, depending on the loan’s terms.
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Types Of Mortgage Refinancing
The three most common types of mortgage refinance options are: rate-and-term refinance, cash-out refinance and cash-in refinance.
The rate-and-term refinance allows homeowners to lower their interest rate and/or change the term, which is the length of time borrowers must pay on their loan. For example, you might want to refinance your 30-year mortgage with a 3.5% interest rate into a 15-year mortgage with a 3% rate. This will help you lower the amount you pay in interest and pay off the mortgage faster.
A cash-out refinance gives homeowners the opportunity to access the equity in their home, with the option to also lower their interest rate.
A cash-in refinance is when homeowners apply cash to the principal, which can help them lower their loan balance, eliminate private mortgage insurance, get a better interest rate or qualify for a refinance.
Mortgage Refinance Industry Insights
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 homes 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.
See Bankrates expert rate trend predictions.
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