Introduction to Refinancing Rates
With refinancing rates still hovering near-record lows in 2022, now is a great time to consider taking the leap. Refinancing involves replacing your old loan with a new loan with lower refi rates and lower monthly payments. The end result: you cut down on your monthly expenses and save a lot more money over the life of your loan.
Before searching for the best 15 year refinance rates or best 30 year refinance rates, know that it only makes sense to refinance if your new interest rate is substantially lower than your old one. The reason for this is that each time you refinance a mortgage, you have to pay new closing costs. In the first few years after purchasing, refi rates 0.75% to 1% lower than your original rate should be enough to deliver savings, while in the mid-to-late years of the repayment term, your refinancing rates need to be 1-2% lower than your original rate for it to be worthwhile.
Another thing to note is that the monthly payments on a mortgage refi have two components: principal, as in the amount remaining on your loan, and interest, as in the money the lender collects for providing the loan. Your APR, or annual percentage rate, consists of the interest rate plus certain other lender fees. The lower the interest rate and APR, the lower your monthly payments to the lender.
How Refi Rates are Calculated
Your financial status
When determining your refi rates, the main things lenders take into account are your credit score, loan-to-value (LTV, amount you owe as a percentage of the current appraised value of the home), and debt-to-income ratio (the monthly payment on your refinanced mortgage and other loans divided by your monthly household income). In order to assess your application, your lender will ask for various documents including social security number, pay stubs and tax returns, and recent bank statements.
Your repayment term
Repayment terms typically range from 10 to 30 years. The shorter your repayment term, the lower your rate but the higher your monthly payment. Therefore, the best 15 year refinance rates are always lower than the best 20 year refinance rates but higher than the best 10 year refinance rates.
Property prices vary a lot from state to state, city to city, and zip code to zip code, so it stands to reason that refinancing rates vary a lot too. You might think that you can find the best refinance rates in your city with a simple Google search for ‘refinance rates your city’. However, the most efficient way to find the best refinance rates in your city is to actually select your favorite lenders and then apply to each one for a rate quote. The good news is that you can get a prequalified quote without any impact on your credit score.
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Types of Refi Rates
Fixed refinancing rates guarantee you a fixed rate for the duration of your new loan. When you refinance with a fixed-rate loan, you pay more in the first year than you would with an adjustable-rate mortgage. However, you protect yourself from the possibility of having to pay a higher rate and higher monthly installments later in life. Given that refi rates are still near historical lows in 2022, the only direction that rates can realistically go from here is upward–which is why locking in fixed refi rates today is probably a better option than betting on an adjustable-rate.
Adjustable refinancing rates, also known as ARMs, carry higher risk and higher reward than fixed rates. ARMs are always cheaper than fixed-rate mortgages in year one but carry the risk of higher interest rates in the long term. ARMs have two components: the number of years the initial rate gets locked in for; and the intervals at which rates get updated. Most lenders offer ARMs of 3/1, 5/1, 7/1, or 10/1. A 3/1 ARM refers to an ARM with a fixed rate for the first three years and a rate update every year after that. The shorter your fixed period, the better your introductory rate (and the riskier the loan). Because of their unpredictable nature, ARMs are best for borrowers with a high-risk appetite or borrowers who plan on selling the home or paying off the mortgage early.
Average Refi Rates Today
Each lender sets its own refinancing rates, and some even update their rates on a daily basis. Of course, all mortgage refinance companies operate in the same market, so their refi rates tend to fall within roughly the same range at any given time.
Average refinance rates today* are:
3.22% for refinance rates 30 year fixed
2.43% for refinance rates 15 year fixed
2.41% for 5/1 ARM
* Rates updated Jan. 10, 2022
Types of Mortgage Refinance Products
A standard mortgage refinance follows the same rules as a standard purchase loan, with a choice of a conventional loan or a government-backed loan such as an FHA loan or VA loan. First, compare the best refinance mortgage lenders. Then, select the mortgage product that suits you and use it to take out a new loan, replacing your old loan. The maximum loan-to-value (LTV) on a standard refinance ranges from 80-97%, depending on the lender and loan type.
A cash-out refinance is when the new mortgage is greater in value than what you owe on the old loan, allowing you to cash out the difference. A cash-out refi can be used for any purpose such as paying off debt, paying tuition fees, making home improvements, or putting money away for a rainy day. The best mortgage lenders for refinancing usually offer cash-out options.
As mentioned in the intro, refinancing involves 2-6% closing costs, just like a regular mortgage. But with the best mortgage refinance lenders, you can skip having to pay upfront closing costs through what’s known as a no-cost refinance. The way it works is that the lender agrees to waive upfront closing costs in return for your commitment to spread the costs over the life of the loan–either by adding the costs to your principal or by increasing your interest rate.
A streamline refinance refers to the refinance of an existing FHA streamline loan (a type of FHA mortgage loan requiring limited borrower credit documentation). A streamline refinance reduces the time and costs to get a refinance. To qualify, your original mortgage must have been an FHA loan, the mortgage must be current (not delinquent), and the refinance must result in a benefit to you (by law, the lender cannot put you in a worse position in regards to the interest rate or repayment term).