As of June 2024, the median APR for a 30-year fixed refinance is 6.95%, and for a 15-year fixed refinance, it’s 6.44%. If your current mortgage rate is higher than these rates, refinancing could be a smart financial move.
However, refinancing isn’t always a smooth process. 26% of refinance applications are denied primarily due to insufficient credit scores, high debt-to-income ratios, and inadequate home equity.
Understanding these requirements before applying can help you save money on your mortgage payments. Look at current interest rates and closing costs to decide if refinancing is worth it. Calculate the risks involved as you shop for a mortgage online.
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What Is Mortgage Refinance?
Mortgage refinance replaces your existing mortgage with a new one with more favorable terms. It allows you to obtain a lower interest rate and a shorter loan term. This is a great way to lower the cost of your mortgages when interest rates fall.
Imagine that your current interest rate is at 7% and you can refinance at 5%. This 2% can have a huge impact on your monthly mortgage payment.
| Mortgage Amount | Interest Rate | Monthly Payment | Monthly Savings |
| $200,000 | 7.0% | $1,330 | 0 |
| $200,000 | 5.0% | $1,074 | $256 |
What Are the Requirements to Refinance Your Mortgage?
To refinance your mortgage, you need to meet some basic requirements:
- Credit Score: A score of 580 or higher is needed. A good credit score will get you better rates.
- Income Verification: Proof of stable income and employment is necessary.
- Home Equity: Lenders often require that you have at least 20% equity in your home.
- Debt-To-Income Ratio: Lenders prefer a debt-to-income ratio below 43%, showing you can handle new payments.
- Appraisal: Your home may need to be appraised to determine its current market value.
Here are the minimum credit score and DTI requirements for different types of refinance:
| Types of Refinance | Min. Credit Score | Max. DTI Ratio |
| Conventional | 620 | 50% |
| Federal Housing Administration (FHA) | 580 | 57% |
| FHA Streamline | 580 | 37% –47% |
| Department of Veterans Affairs (VA) | 580 | 45%-60% |
| VA IRRRL | 580 | 45%-60% |
| Jumbo | 680 | 45% |
Reasons to Consider Refinancing
There are various compelling reasons to refinance your home loan:
- Lower Interest Rates: Refinancing can reduce your monthly payments and overall interest paid.
- Access to Home Equity: Access to the equity in your home gives you cash for home renovations and debt consolidation.
- Change Loan Terms: It allows you to shorten or lengthen your loan term. You can either reduce your monthly payments or help you pay off your mortgage faster.
- Switch Loan Types: You can move from an ARM to a fixed-rate mortgage which provides stability in your monthly payments.
- Improve Your Financial Situation: You can pay off high-interest debts by combining them into one loan with a lower interest rate. This can make managing your payments easier and more affordable.
How Do You Refinance Your Home?
Here are the steps to refinance your home:
- Shop for Lenders: Compare rates and terms from different lenders to find the best deal.
- Submit an Application: Complete a refinance application with your chosen lender.
- Provide Documentation: Submit documents such as proof of income, tax returns, and bank statements.
- Appraisal and Underwriting: Your home appraisal is conducted and the lender will review your application during underwriting.
- Closing: Once your application is approved and the appraisal is completed, you will close on the new loan.
Is Refinancing Worth It?
Refinancing home loans can be worth it if the new loan offers better terms than your current one. Make sure the new loan has a significantly lower interest rate. A small difference might not outweigh the refinance costs.
Compare the long-term interest savings with the upfront refinancing expenses like closing costs and appraisal. Aim to recoup these costs within a reasonable time so that the refinance is financially beneficial.
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Frequently Asked Questions
What do I need to refinance my home?
Refinancing your home requires a strong credit score, proof of income, and documents of your home's value and ownership. Be prepared to show a low debt-to-income ratio and sufficient equity (at least 20%) to qualify for the best rates.
What if my credit score isn't high enough to qualify for the best refinance rates?
Consider getting an FHA loan. These government-backed loans have lower credit score requirements compared to conventional loans. However, there are also upfront mortgage insurance premiums (MIP) associated with FHA loans.
Should I refinance my mortgage if I plan to move in a few years?
Refinancing might not be the best option if you plan to move soon. Closing costs associated with refinancing can range from $4,000-$10,000 which is significant. You might not have enough time to recoup those costs before selling your home.
What documents do you need to refinance your home loan?
To refinance your home loan, you will need proof of income (pay stubs, tax returns), employment verification, credit report, bank statements, information on current debts, and a home appraisal report.
