15 Essential Mortgage Refinance Tips

Ready to refinance your mortgage? Lower interest rates or better terms may incentivize you to consider refinancing your mortgage. If you've worked to raise your credit score, even if interest rates are the same, you could save with a refinance. A refinance could help you access equity or secure better terms to restructure your finances, but the decision comes down to personal financial considerations. Read on for the best mortgage refinance tips to get started this year!

15 Essential Mortgage Refinance Tips

Here are essential mortgage and refinance tips to get you started. 

Identify the Purpose Behind Your Decision to Refinance

It’s important to identify the purpose behind your decision to refinance. Have interest rates dropped significantly? Did you raise your credit score? 

Possible reasons to refinance:

• Access equity in the home, especially if it has appreciated in value.
• You can qualify for lower interest rates or better terms.
• You want a longer mortgage term.
• You need to access equity in the home. 

Check Your Financial Health and Work on Improving It

Next, it’s important to check your financial health. Even if you have an existing mortgage, it doesn't mean you'll qualify for a refinance. You'll need to check your credit score and DTI. Here is why lenders check these numbers:

• Credit score: This tells lenders the statistical probability that you'll default on the loan. A higher credit score will increase your chances of approval and a lower interest rate, but some lenders could approve a refinance with a credit score of 620. 
• Debt-to-income ratio: Your ratio of total income to debt tells lenders whether you can afford the loan. If you've taken on additional debt and your DTI has increased, you might not qualify for a refinance. As with a mortgage, a common benchmark is a maximum DTI ratio of 43% when refinancing. 

Understand Your Home Equity

Before refinancing, it's essential to understand your home equity. Equity is the amount of asset value you've built up in your home. It takes into account both the payments you've made on the mortgage principal and any increase in the home's appraised value. Understanding your equity is essential to the success of your mortgage refinance application.

For example, suppose you bought the home for $300,000, and its appraised value five years ago was $300,000. You made on-time mortgage payments for five years and built up around $17,000 in home equity. But there's more! Suppose the home's value also increased to $340,000 in that time. Now, instead of having $17,000 equity in the house, you will have $57,000 in home equity. 

On the other hand, if your home is worth less now than when you bought it, you may have negative equity, making it difficult to refinance. If you have at least 20% home equity, you'll have an easier time qualifying for a mortgage refinance. You can learn how to calculate your home equity here. 

Factor in the Closing Costs

Closing costs when you refinance a mortgage are between 3% and 6% of the total loan amount, although you may be able to roll some or all of them into your mortgage. These costs cover home appraisal and the loan underwriting process. 

For example, you can roll the costs into your new loan if you have enough equity. In addition, some lenders offer a no-closing cost refinance, but you will pay for that with a higher interest rate that covers closing costs. 

Closing costs can be fixed fees or a percentage and include:

• Loan application fee: $75 to $500
• Home appraisal: $225 to $700
• Credit report fee: $10 to $100 per applicant
• Document preparation fee: $50 to $600
• Title search/insurance fee: $400 to $900
• Loan origination or underwriting fee: 0% to 1.5% of loan 
• Mortgage insurance: 0% to 3.6%, depending on mortgage type and equity in the home. 

Shop Around With Multiple Lenders 

Since closing costs are the biggest new expense in a mortgage refinance, it's important to shop around and compare lenders. You could qualify for better terms, interest rates, or lower closing costs. The difference between 2% and 6% of a $300,000 mortgage could mean a savings of $12,000!

(Do not include in numbering) Find the Best Mortgage Refinance Companies From Benzinga’s Best Providers

Here are some of the best mortgage refinance lenders who can provide a free quote and help you find the best loan for your needs. 

Choose Between a Fixed-Rate Mortgage or Adjustable-Rate Mortgage

Each time you get a mortgage, you must choose between a fixed-rate mortgage and an adjustable-rate mortgage. Choose a fixed-rate mortgage if you plan to stay long-term to avoid the risk of rising interest rates later. On the other hand, consider an adjustable-rate mortgage if you plan to move soon and the current offered adjustable rate is favorable. 

Calculate the New Monthly Payment and Ensure Affordability

You can use a mortgage calculator to input the new mortgage amount, interest rate, and any changes to mortgage insurance or taxes. 

For example, if you were paying $2,000 a month on your existing mortgage and you want to refinance for $275,000 with the current 7% interest rates, you'd end up paying $1,829.58 a month without accounting for property tax, insurance, and PMI or MIP. 

Should you refinance in that case? If your previous $2,000 payment included these, you're likely better off staying with your existing mortgage. If not, you could save about $170 a month, but after accounting for closing costs, it may not be worth it. 

Time Your Refinance Application 

Of course, when interest rates are exceptionally high, it's not the best time to apply for a refinance. Timing your refinance application to, when rates are favorable overall, can help you find the best deal. Most mortgage lenders will allow you to lock in the rate for up to 30 days, some allow for longer. This gives you time to complete the underwriting process and secure a better interest rate. 

Be Cautious of No-Closing-Cost Refinances

A no-closing-cost refinance is a type of refinance that rolls the closing costs into the mortgage and typically offers a higher interest rate. Carefully compare rates and proceed cautiously, as you'll typically end up paying more on monthly mortgage payments for the convenience of no upfront payments. 

Ensure Upgrades are Easily Accessible

If you've made home upgrades that can increase your home's appraised value, it's also important to make home upgrades easily accessible for the appraiser. The appraised value is the basis the lender will use in determining your equity in the home and thus, the loan amount, terms, and whether you need PMI. 

Prepare Yourself for Successful Appraisal

A house appraisal looks at the structure of the home, as well as the neighborhood and comparable homes, to determine its current market value. You can do an unofficial appraisal on your home by comparing similar homes within the neighborhood that have recently sold. However, you will need an official home appraisal for loan approval. In some cases, you may get an appraisal for free.

Aim for a Break-Even Point Within 2-3 Years 

When you see $250 in monthly savings, that may seem amazing. But if you're paying $12,000 upfront for those savings, it's unlikely to be the best financial move, even if you're rolling the difference into the mortgage. 

That's where calculating your break-even point comes in. The break-even point in the case of a mortgage refinance is how long it takes to recoup your closing costs and actually start saving. You'll save $3,000 a year on mortgage payments in the example above. If you paid $12,000, your break-even point is four years. 

Aim for a break-even point within two to three years. In this example, you could shop around with different lenders. If you find a lender offering the same interest rate but with just $6,000 in closing costs, your break-even point would drop to two years. This can be a good financial move if it makes sense for you in other ways. 

Be Prepared to Pay for Private Mortgage Insurance

If you refinance your home with less than 20% equity, you might pay for private mortgage insurance (PMI). This is true for conventional loans, while federally backed USDA, VA, or FHA loans have their own qualifications but usually charge some form of mortgage insurance for borrowers with less than 20% equity.  

For many borrowers, the reduced monthly payments from a refinance won't be low enough to offset the additional cost of PMI. A lender can quickly calculate whether you must pay PMI and its effect on your monthly mortgage payments.  

Impact on Your Taxes

If you've been deducting mortgage interest payments from your tax bill, a refinance can reduce the amount you can save on taxes. While you may be paying less interest, you will have to pay more taxes. However, most people don't consider this a reason to avoid refinancing. 

Also, the new higher standard deduction — $29,200 for married couples filing jointly in 2024, may mean that fewer families choose to itemize deductions less (and thus won't save on interest payments in either case). If you're in doubt, speak with a tax advisor or CPA to understand the impact of a refinance on your taxes and overall finances. 

Deciding When to Refinance

Deciding when to refinance comes down to looking at your total financial picture, your home equity, and your break-even point. Refinancing can be a good idea if you can save on monthly mortgage payments and the break-even point is under three years. Be sure to shop around and research lenders to find the best available rates, and carefully compare your monthly payments with all interest and fees. You can find some of the best mortgage refinance lenders and get started. 

Frequently Asked Questions