When should you
refinance a mortgage?
With a home refinance, you pay off your existing mortgage and replace it with a new mortgage that has a better rate or better terms. You may refinance to save money on interest or reduce your monthly payments. There may be other benefits to refinancing too.
Homeowners typically refinance their mortgages when current interest rates are significantly lower than the rate on their current loan. That’s because you want refinancing to make sense after you pay the closing costs which are often required. Use our mortgage refinance calculator to estimate how much you might save by lowering your interest rate, changing your loan term, and more.
What type of refinance is right for you?
At Freedom Mortgage, your mortgage refinancing choices depend on the kind of home loan you have. Homeowners with existing VA and FHA loans can often choose streamline refinancing to lower their interest rates with less paperwork, easy credit qualifications, and fast closings. USDA loans have a streamline refinance option too.
Conventional mortgages do not have a streamline refinancing option. Conventional refinances are sometimes called "rate and term" refinances. To refinance conventional loans, you need to complete a new application and provide new financial documents. We’ll recheck your credit too. As a result, conventional rate-and-term refinances can take longer to close compared to streamline refinances.
VA streamline refinancing (IRRRL)
If you have a VA loan for your current home, you may qualify for VA streamline refinancing. This is also called a VA IRRRL or "Interest Rate Reduction Refinance Loan." Streamline refinances let you lower your rate with less paperwork and faster closings. You can only refinance into a new VA loan with the streamline program. Learn more about streamline refinancing by visiting our Get Started page or calling 844-267-6544.
FHA streamline refinancing
The FHA loan program also offers streamline refinances for homeowners who currently have FHA mortgages. FHA streamline refinances help you lower your rate with less paperwork and faster closings. You can only refinance into a new FHA loan with the streamline program.
USDA streamline refinancing
Homeowners with current USDA loans also have a streamline refinancing option, with similar benefits and requirements as other streamline refinances. USDA loans make homeownership more affordable for people living in rural and some suburban areas.
Conventional "rate-and-term" refinancing
Conventional loans do not have streamline refinances. You have to complete a new application and provide a new set of documents to qualify. Conventional rate-and-term refinances often have higher credit score and home equity requirements compared to streamline refinances. The maximum amount of allowable debt (also called your "debt-to-income ratio") is typically lower for conventional refinances too.
Conventional refinances have advantages. You can refinance any type of home loan with a conventional mortgage including VA, FHA, and USDA loans. You can refinance primary homes, vacation homes, rental properties, and investment properties with conventional loans. You can only refinance your primary home with a VA, FHA, or USDA loan.
There are many reasons to refinance a home loan. Homeowners often look at refinancing when interest rates are falling to save on interest or reduce their monthly mortgage payments. If you can get a new rate that is better than your current rate, you might save money over time. Other reasons to refinance a mortgage include …
- Lowering monthly mortgage payments
Refinancing a mortgage may help to reduce the size of your loan payments each month. You can use the savings to invest in college and retirement accounts, to pay bills, to pay down other debts, and more. By refinancing a home loan, the total finance charges may be higher over the life of the loan.
- Getting cash from home equity
Refinancing a home mortgage may also help you get cash from your home’s equity. This is called a "cash out refinance." You pay off your current mortgage balance and replace it with a new mortgage for a higher principal balance, and get the difference as cash at closing. You may use this money to do things like pay down higher interest debts or invest in home improvements.
- Shortening the life of the home loan
When you pay off a mortgage sooner than the terms require, you might save money on interest. That’s because you are paying back the interest over a shorter period of time. Some homeowners refinance mortgages to shorten the life of their loans. Keep in mind that it is often not necessary to refinance your home to pay off a mortgage faster. You can simply make extra payments.
- Making mortgage payments more predictable
If you have an adjustable rate mortgage, you can refinance your home loan to a fixed rate mortgage and make your monthly payments more predictable. With an adjustable rate mortgage, your interest rate and monthly payments can change every year. With a fixed rate mortgage, your interest rate and monthly payments stay the same.
- Removing mortgage insurance
Some homeowners refinance to stop paying mortgage insurance. If you have an FHA loan, refinancing to a conventional loan might help you stop paying FHA mortgage insurance premiums. You don’t always need to refinance your mortgage to get rid of mortgage insurance. If you have a conventional mortgage, you should be able to stop paying for private mortgage insurance once your home equity reaches 20%.
Refinancing a mortgage comes with a new application, new paperwork and documentation, and new fees and costs. Sometimes you pay these home refinance expenses out of pocket. Sometimes you can add these costs to your new mortgage balance. Let’s take a look at what refinancing your mortgage can require:
- A new application and documentation
Because refinancing a house involves getting a brand-new mortgage, you typically need to complete a new mortgage application. Lenders like Freedom Mortgage are likely to request a copy of your credit report from the credit reporting agencies. We may also ask you to document your income and finances for many types of refinances. We may want to see pay stubs, tax returns, bank statements, a payment history on your current loan, and other documents as well.
- A new home appraisal
Depending on the home loan, you may be required to get a new home appraisal. This new appraisal will estimate the current fair market value of your house and can cost between $300 and $500.
- New closing costs
Many times when you refinance your mortgage you will need to pay a new set of closing costs. These may include things like a loan application fee, origination fees, home appraisal fees, the cost of points to buy down the interest rate on the loan and more. At Freedom Mortgage, we’ll make sure you understand all of the costs of refinancing your home to insure you feel confident in your decision to refinance.
- New mortgage insurance costs
Mortgage refinances can come with new mortgage insurance premiums and fees. When you are refinancing with a conventional mortgage, you will have to pay for private mortgage insurance if your loan-to-value ratio is greater than 80%. When you refinance with an FHA loan, you may have to pay a new upfront mortgage insurance fee plus monthly mortgage insurance premiums. Refinancing with a VA loan can come with a new "funding fee" which is used to help protect the program if a borrower defaults on a loan. At Freedom Mortgage, we’ll help you understand if there are any mortgage insurance costs that apply to you.
- Prepayment penalties
Some mortgages come with pre-payment penalties, which are fees you have to pay if you pay off the mortgage sooner than the terms require. Refinancing these mortgages involves paying off your current mortgage and replacing it with a new loan. Look at the terms of your current mortgage and see if there is a pre-payment penalty. If there is, include this penalty in your refinancing calculations. There are no prepayment penalties on most home loans Freedom Mortgage originates.
- Higher monthly payments
Some types of mortgage refinances may increase your required monthly payments. When you get a cash out refinance, your monthly payments might increase because you are increasing your loan balance by taking cash out of your home’s equity. When you shorten the life of your home loan by refinancing, your monthly payments might also go up. Freedom Mortgage will give you a Loan Estimate and Closing Disclosure which show how much your new monthly payments will be. You will get to review these numbers before you accept your home refinancing offer.
It’s important to decide if refinancing your mortgage makes financial sense. Many homeowners do this by calculating a “break even” point, which is the moment when the costs of a home refinance have been paid for by the money it saves.
For example, if you are thinking about a mortgage refinance which will save you $100 a month and has $1,500 in closing costs, it will take you 15 months to “break even” and begin to save money. This is the reason real estate professionals often recommend you do not refinance your mortgage when you are planning to sell your house soon. That’s because the savings from a refinance might be minimal if you only live in the house a short time before you sell. You can use our mortgage refinance calculator to help you estimate your potential savings.
Also look at the total amount of money you might pay in interest. By refinancing, the total finance charges you pay may be higher over the life of the loan. This may happen when you extend the term of your loan. For example, if you have 20 years left on your mortgage, and you refinance your home with a new 30 year mortgage, you pay more money in interest charges even if you lower your interest rate.
If you are a current Freedom Mortgage customer, we can often refinance your home to a lower rate while keeping your loan term the same. Ask us if we can do this for you!
There are other important steps to take when you want to refinance your mortgage. These steps include:
- Checking your credit score and finances
We use your credit score to help us decide whether you qualify for a home loan and the interest rate we might be willing to offer you. So it’s a good idea to review your credit score and credit report to make sure they are accurate. Your income, how much you owe on loans besides your mortgage, and your payment history can also affect your eligibility for a refinance. A better credit score might get you a better interest rate too!
- Estimating your home’s value
Your home’s current fair market value can influence whether you qualify for a refinance. That’s because we use your house’s value to calculate a loan-to-value ratio. Loan-to-value ratio is a percentage we get by dividing the size of your mortgage by the value of your house.
For example if your home is worth $200,000 and you would like to refinance it with a $150,000 mortgage, then the loan-to-value ratio is 75%. (Calculation: $150,000 ÷ $200,000 = 0.75 or 75%.)
Mortgage refinance loans have maximum loan-to-value ratios and you have to stay at or below these maximums ratios to qualify for a loan. Generally, the lower your loan-to-value ratio, the greater the chances your refinance loan will be approved.
- Ask us what interest rate we can offer you!
The rate we may be able to offer is personal to you. Your interest rate is affected by the type of refinance loan you want, your credit score, your income and finances, as well as the current mortgage market environment. Freedom Mortgage may be able to offer you a refinance rate that is higher – or lower – than the rate you see advertised by other lenders. Call us today at 877-220-5533.
Loan options for you
Compare the various loan types to find a mortgage that is best for your needs.
|Appraisal needed Yes||Appraisal needed No for Streamline||Appraisal needed No for Streamline||Appraisal needed No|
|Income verification Yes||Income verification Varies by loan||Income verification Varies by loan||Income verification Varies by loan|
|Credit requirements Yes||Credit requirements Varies by loan||Credit requirements Varies by loan||Credit requirements Varies by loan|
|Mortgage insurance Yes, if less than
|Mortgage insurance No||Mortgage insurance Yes||Mortgage insurance Yes|
|Loan-to-value ratio (LTV) limit Yes||Loan-to-value ratio (LTV) limit Varies by loan||Loan-to-value ratio (LTV) limit Varies by loan||Loan-to-value ratio (LTV) limit Varies by loan|
|Loan restrictions Any loan type||Loan restrictions Must have a VA loan||Loan restrictions Must have an FHA loan||Loan restrictions Must have a USDA loan|
What our customers say about refinancing their home loans
Check out the reviews from some of our customers.
Reviews and comments (i) have been submitted by customers voluntarily, (ii) are solely the views of such customers, and (iii) have been screened by Freedom Mortgage Corporation prior to publication in accordance with our guidelines. Customers were not compensated for their reviews/comments but were informed that the submittals may be used in Freedom Mortgage Corporation advertising. Customer experiences are not meant to suggest future performance and may not be representative of your experience.
Tips & Insights
Get the latest tips and insights to guide you throughout your homeownership journey.
Get started today by getting a personalized evaluation of your home loan options from Freedom Mortgage.