With current mortgage rates on the decline it may be a great time to look for the best refinance rates that will save you money on your mortgage. Most experts agree that interest rates have nowhere to go but up, so now could be your best chance to take advantage of favorable conditions.
Current refinance rates
According to the latest survey of the nation’s largest mortgage lenders, these are the current refinance average rates for a 30-year, 15-year fixed and 5/1 adjustable-rate mortgage (ARM) refinance rates among others.
|30-Year Fixed Rate||3.190%||3.400%|
|20-Year Fixed Rate||3.150%||3.380%|
|15-Year Fixed Rate||2.630%||2.830%|
|5/1 ARM Rate||3.430%||4.040%|
|7/1 ARM Rate||3.520%||4.000%|
Rates data as of 8/28/2020
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The SimpleScore is our proprietary scoring metric to compare products and services at The Simple Dollar in a transparent, evidence-based way. Our editorial team identifies five quantifiable aspects to compare for every brand, determines the rating criteria for each aspect score, then averages the five aspect scores to produce a single SimpleScore. For mortgage refinancing loans, we compared perks, credit impact to check rates, customer satisfaction, minimum credit score and fees for every major lender. Our ratings are meant to be a directional tool to help you in the process of choosing a mortgage refinance provider. Be sure to continue your research and shop around for the best mortgage refinance loan that fits your specific needs.
Covid-19 and the impact on refinance rates
If you’ve been considering refinancing, this could be the perfect time to make your move. Refinancing rates have been steadily declining since the start of the coronavirus pandemic, which means it’s a great time to put some extra cash in your pockets via the savings from the low interest rates.
As of Aug. 24, the 30-year fixed rates had fallen to 3.220% and the 15-year fixed rates dropped to 2.720% — both of which are extremely low for refinance rates. The 10-year rate remained low and flat at 2.82%.
Rates are expected to remain low for the rest of the year, but Freddie Mae and Fannie Mac recently announced that a 0.5% agency fee is being added to all related loan closings after Sept. 1. This fee translates to a slight increase in the cost, which will cover “risk management and lost forecasting” during the coronavirus pandemic.
Don’t let the fee keep you from refinancing, though. Rates are likely to stay low, and you have a good chance of recouping that fee in the savings from the lower rate you refinance to. Keep in mind, though, that the increased demand to refinance and today’s economic state has translated to stricter loan requirements for borrowers, so you’ll need to make sure you have your finances and documents in order before applying.
COVID-19 Update: We're keeping track of how the coronavirus pandemic is affecting refinance rates. Read More.
The best refinance lenders for 2020
- Third Federal Savings: Best for Minimal Fees
- Rocket Mortgage: Best for Fast Refinancing
- Bank of America: Best 15-Year Fixed APR
Third Federal Savings – Best for Minimal Fees
Third Federal keeps it simple with one rate for its mortgage products, but it’s less forthcoming about eligibility requirements.
Minimum Credit ScoreN/A
Our Two Cents — Third Federal Savings gives one rate for all borrowers and a 60-day rate lock to help guarantee the best rate even when the market fluctuates.
Rocket Mortgage – Best for Fast Refinancing
Rocket Mortgage has the power of Quicken Loans with some of the lowest rates available.
Minimum Credit Score5
Our Two Cents — Rocket Mortgage makes home buying and refinancing an easy, streamlined process that’s easy with the help of customer service and their mobile app.
Bank of America – Best 15-Year Fixed APR
Competitive rates and low fees make Bank of America a strong pick for your mortgage refinance.
Minimum Credit Score3
Our Two Cents — Bank of America makes it easy to check rates and handle refinancing on the go.
Is now a good time to refinance?
Generally, the best time to refinance your mortgage is when rates are low to help you save money and pay off your mortgage. Getting a rate that’s even half a percentage point lower than your current rate can save you money in the long run.
The second and third quarters of 2020 have been the perfect time to refinance your home with some rates as low as 2.50%. The coronavirus pandemic has led to low rates across the board and many predicting that they’ll continue to remain low into 2021.
The remainder of the year looks just as hopeful for those on the fence. But even though rates are low, there are still predictions that they could slightly increase by the end of the year. For now, they’re on a steady decline. The 30-year rate dropped -0.15%, while the 15-year rate decreased by 0.09% and the 10-year rate remained unchanged. Despite the Adverse Market Refinance Fee it’s a great time to speak to your lender about the potential savings you’d reap by refinancing now.
New fee announced mid-August by mortgage giants Fannie Mae and Freddie Mac
Homeowners will have to pay hundreds of dollars out of pocket if they’d like to refinance now. In mid-August mortgage giants, Fannie Mae and Freddie Mac, made an announcement that makes refinancing and the overall closing cost more expensive. Freddie Mac explained in his announcement that the 0.5% Adverse Market Refinance Fee is put in place “As a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.”
The fee will go into effect on Sept. 1. It will apply to all homeowners that haven’t closed on their refinance process before then — even for those who have already started the refinancing process. It applies for both no-cash-out and cash-out refinancing but does not apply to mortgage loans.
Why Refinance Your Mortgage?
It’s common for people to transfer their balance from a credit card with a high interest rate to one with a lower interest rate, resulting in a more manageable monthly payment and a bit more breathing room in their budget. Refinancing your mortgage at a lower rate can allow for the same thing on a bigger scale. You may also want to refinance to obtain a shorter loan term or a different type of mortgage.
Whatever your reason, refinancing can save you money in the short term, the long term, or sometimes both.
When should you not refinance?
There are a number of scenarios in which you shouldn’t refinance. If you have less than 20% equity on your home lenders may be skeptical to refinance you because the loan will seem less risky, especially if you don’t have enough for a sizeable down payment or closing costs. Most importantly, you’ll want to make sure that the long term costs don’t outweigh the savings you expect. Sometimes a lower monthly with a longer loan term could cost you more in interest over the course of the loan.
A few other reasons you might want to wait to refinance is if you have a low credit score, cannot afford closing costs or if you don’t plan on staying in the home for more than three years – otherwise you won’t break even on the refinancing costs.
Most importantly, you’ll want to make sure you’re getting the best interest rates so watch the market closely and reach out to your lender for questions.
Types of mortgage refinancing
If you’re looking at refinancing now there are three types of mortgage refinancing options to consider. Remember, each refinancing option depends on your financial situation and it’s best to speak with your lender about the terms and conditions before making a decision.
- Rate and term finance – Changing your loan terms or refinancing your existing mortgage loan for a lower interest rate. Rate and term refinancing is better known as a no-cash-out refinance because new money is not being added to the loan. This refinancing option is most common when there are low interest rates. It is often used to lower monthly payments with a lower rate, but could also mean a longer mortgage term.
- Cash-out refinance – Homeowners who choose this option will be replacing their current mortgage loan with a new loan that gives them more money. They’ll be able to use the difference between these two loans as cash for renovations or to consolidate debt. Since you’re increasing the overall loan amount you can expect higher interest rates than rate and term financing. Oftentimes, you can borrow up to 80 percent of the home’s value in cash, but it’s best to check your lender’s cash-out refinancing terms and options.
- Streamline refinance – Streamline refinancing is only for homeowners who have a HARP, FHA or VA mortgage loan. These programs may exempt certain verification requirements during the refinancing process. You may be able to bypass credit checks or income verification, making the process faster with less paperwork since this option does not let you change loans when using streamline refinancing. This option may be best for homeowners looking to reduce their monthly payments and have a lower interest rate.
Closing costs for refinancing
Many may not know, but refinancing comes at a cost. You’ll want to factor in similar fees to when you first financed your home. That includes fees including appraisal fees, credit reporting fees, taxes, attorney costs and more. Freddie Mac’s refinancing breakdown shared that some closing costs total an average of $5,000. The costs will depend on a number of factors including your loan balance and the type of refinancing option you’ve chosen. It may also depend on state taxes and local costs.
How to get the best refinance rates
There’s little magic involved in getting the best mortgage refinance rates. Like most other financial decisions, you’ll need to do a little research and some comparison shopping. If your finances aren’t in top shape, you may also need to put in some hard work to raise your credit score and reduce your debt load before refinancing.
Step 1: Do the math.
Before you shop for mortgage refinance rates, play with the numbers using a refinance calculator. Selecting a shorter mortgage term can lower your interest rate, saving you much more in the long run and getting you out of debt faster — but it will also boost your monthly payment. You’ll want to decide what you can comfortably afford before a lender tries to make that decision for you.
Let’s say I originally obtained a conventional 30-year, $250,000 mortgage five years ago at an APR of 5.50%, and my current balance on the mortgage is now $230,000. Here’s what the numbers could look like according to new loan terms and average refinance rates, assuming $2,000 in closing costs (keeping in mind that shorter loan terms usually come with lower APRs):
|New term and APR||Change in monthly payment||Amount saved over life of loan|
|30 years, 4.5%||$253 less||$6,164|
|25 years, 4.375%||$157 less||$47,054|
|20 years, 4.250%||$6 more||$83,883|
|15 years, 4.0%||$282 more||$119,469|
If getting the lowest interest rate is my top priority, that 15-year term looks pretty sweet — and so does saving more than $119,000 in interest over the long run. But I’ll need to cough up an extra $282 a month.
Step 2: Make sure your credit is in top shape.
Your credit score will affect the interest rate you receive just as much as it did when you obtained your original loan. For that reason, refinancing will often provide the greatest benefit for anyone who has seen their credit score climb since getting their mortgage.
Wondering how much your credit score can affect your refinance rates? According to myFICO estimates, someone refinancing a conventional 30-year, $300,000 loan with excellent credit would receive an average APR of 4.125% as of March 2018. Meanwhile, someone with only fair credit would see an average rate of 5.714%. The excellent-credit borrower would pay almost $300 less per month. Here’s a more detailed breakdown:
|Credit score||APR||Monthly payment|
If your score is lower than 620, you’ll have a tough time refinancing with most traditional lenders. Credit unions and local banks may offer a bit more wiggle room than bigger banks, but your chances of approval will be much better (and your APR much lower) if you take time to focus on raising your credit score first.
Step 3: Chip away at your debt.
Your credit score isn’t the only thing helping to determine your interest rate. Lenders also want to make sure you aren’t burdened by too much debt — after all, if you can’t keep up with your credit card payments, your mortgage could be next.
The number they’ll look at is your debt-to-income ratio, or DTI, which is simply the percentage of your gross income that your debt payments will eat up — those include student loans, car payments, and minimum payments on your credit card balances, as well as your potential mortgage. Someone earning $4,000 a month with total debt obligations of $1,000 a month has a DTI of 25%.
DTI requirements vary by lender, but most will want to see a maximum of around 43% DTI — and lower is better. So if you have a monthly gross income of $6,000 a month, you would want to make sure no more than $2,600 is being used to pay off debt.
If your DTI isn’t looking so hot, it may be time to form a game plan to help you reduce your debt load. Simple debt-reduction strategies like paying more than the minimum every month can ultimately reduce your DTI and put you in a better position to refinance mortgage rates.
- Related: 11 Ways to Get Out of Debt Faster
Step 4: See if Uncle Sam will help.
If you have an FHA loan, you might be eligible for the FHA Streamline Refinance, which doesn’t require a new home appraisal for you to obtain a lower interest rate. For that reason, the program can be enormously beneficial for those with homes that have dropped in value.
Step 5: Don’t forget about closing costs and fees.
Whether you’re buying or refinancing, there’s nothing cheap about getting a mortgage. There are application fees, home appraisal fees, attorney’s fees, survey fees, title searches — the list of things you may pay for to refinance is long, and will probably cost at least a few thousand dollars by the time it’s said and done.
Because closing costs and fees are not exactly insignificant (they average about $2,000 or more on a $200,000 loan, depending on the state you live in) be sure to decide whether it makes the most sense to pay cash at closing or add them to your loan. The former is ideal for anyone who wants to pay the least long term, while rolling them into the loan might be the better option for someone who doesn’t want to dip into savings.
Another option is a “zero closing cost” mortgage, where you may pay a slightly higher interest rate in exchange for your lender ponying up at closing. Again, this makes the most sense for someone who doesn’t have the cash on hand for closing costs or who might not stay in their new home long enough to recoup those costs and start benefiting from lower home refinance rates. If you’re aiming to stay in your home long term, you’ll probably pay more going this route.
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- Tips for Finding the Best Mortgage Lenders
- Buying a Home Soon? Put Your Credit on Lockdown
The impact of COVID-19 on refinance rates.
The real estate market is changing due to the COVID-19 pandemic, and those changes extend to both traditional mortgage loans and refinance loans. To stimulate the economy, the Federal Reserve made two mortgage rate cuts in March and another one in February, setting a federal fund rate to a range of 0% to 0.25%. These Fed Rate tweaks resulted in lenders dropping mortgage refinancing rates to record-breaking lows, which has driven an increased interest in refinancing by homeowners looking to save money on interest.
Today rates on mortgage refinance loans are at or near a record low. Refinancing rates fluctuate with the increased demand, but overall, they’ve stayed lower than they have been in the last decade. Homeowners who have been considering a loan refinance may be able to cut the total interest costs on their loans significantly by refinancing to a new loan right now.
But, while refinancing rates are very low right now, lenders have tightened the requirements for borrowers in recent months due to the economic downturn caused by COVID. There are plenty of lenders who will work with borrowers who don’t have perfect credit or a low debt to income ratio, but you’ll need to do your homework to find one that works for you. The pandemic has made the lending atmosphere that’s both potentially lucrative for homeowners and potentially frustrating for borrowers, so make sure you work to find the best lender for your needs.