If you’re a homeowner looking for ways to lower your monthly expenses, one of the alternatives you may be considering is refinancing your home. Interest rates are low, and reducing your rate on a large loan like a mortgage can result in significant savings.
Refinancing your mortgage simply means you’re replacing your current mortgage loan with a new one. Although lowering interest rates to improve cash flow is one of the main reasons homeowners choose to refinance, other reasons include changing the loan’s term, switching from an adjustable-rate to a fixed-rate loan, switching from an FHA backed loan to a conventional loan, or tapping into the equity in your home to finance projects like making needed repairs.
Should I Refinance?
Your first step in considering whether to refinance or not is to determine what you hope to achieve – for example obtaining a lower monthly payment (thereby improving your cash-flow) or going for a long-term savings on interest. “You need to look at your goals in reference against interest rates, costs and your expected ownership time frame in order to see if you can actually achieve your goal,” says Keith Gumbinger, Vice President of hsh.com, an online consumer mortgage resource. He goes on to caution that many homeowners looking to save money by refinancing with a better rate for a lower monthly payment might actually end up paying more over the full term of the loan.
There are typically fees and closing costs associated with refinancing your loan. Though a mortgage refinance may offer a lower interest rate, consumers must factor in these fees and costs in order to determine whether or not refinancing makes financial sense over the life of the loan. Other considerations when evaluating whether to refinance include how much equity you have in your home, the amount of interest you have already paid, and how long you have left on the original mortgage.
Important Things To Know About Mortgage Refinancing:
Just as being informed and prepared can help you find the best rates on primary mortgages, becoming familiar with the mortgage refinance market can help you find the best alternative for your particular situation. The following are some of the more important issues you should be aware of when refinancing.
Mortgage refinancing could extend the length of your loan.
When you replace your mortgage loan with a new one via refinancing and you choose the same term, you could be agreeing to make mortgage payments for a longer period of time. For example, if you’re five years into a 30-year mortgage and then refinance into a new 30-year mortgage, you reset the clock and now have a new loan for 30 years (not 25). However, this could be a good financial move if the interest rate is such that you’re spending less money over the course of the new loan than you would have if you’d continued with the old one. Additionally, you could always elect to make voluntary prepayments if you are financially able and your lending institution does not charge penalties for doing so. This will shorten the term of the refinance.
There are costs and fees associated with refinancing a mortgage.
You’ll likely have to pay for an appraisal, credit check, origination fees, title company fees, closing fees, and more. These fees, on average, are 2% to 4% of the total loan amount. Take these into consideration when deciding if refinancing is right for you. To get an idea of the types of fees and related costs you may be assuming when refinancing, look at the documentation for your existing loan. These fees can usually be found in the document called “Closing Disclosure” (for loans originated prior to 2015 the form is called the “Settlement Statement”). It will give you a good idea of what these costs could be. You should also ask your refinancer for a list of fees. If there’s something on the list you don’t understand, ask for clarification. If you don’t get a clear answer, it may be time to look for another lender.
When evaluating closing costs, you also want to see what your break-even point will be. If your closing costs are $5,000, and your monthly savings on mortgage payments are $100.00, it will take a little over four years (50 months) to recoup those costs or break even, so your savings won’t start until after you’ve reached this point. While this time period is standard for original mortgages, the preferred break-even point in refinancing should be about two years (or less). If you plan on selling your home before your break-even point, the refinance will cost you money instead of saving it.
There are companies that offer zero closing cost options for those who don’t have the cash to pay them upfront. This doesn’t mean you won’t have to pay these costs, it just means you don’t have to have the money to pay for them in order to close. In this case, the closing costs are either built into the interest rate, meaning a higher rate and monthly payment, or added onto the principal at a lower interest rate, which may mean extending the term of your loan. You need to evaluate both of these options to see what works best for you if you go for zero closing costs.
People with the best credit scores typically get the best interest rates.
If you want to qualify for the lowest mortgage refinance rates of 2020, it’s best if you have a credit score above 750. Most mortgage companies require a minimum credit score of 640 for approval. FHA loans accept scores as low as 580. Getting a better interest rate, even if it’s just .015% lower, can mean significant savings over the life of the loan.
It’s important to have at least 20% equity in your home before refinancing. If you don’t, you’ll have to pay for private mortgage insurance, which will increase your monthly payment.
Make sure you have a low debt to income ratio.
This is the percentage of your gross monthly income that goes towards debt every month. In the past, mortgage lenders were more flexible when it came to this percentage, but now they are more stringent. The max debt to income ratio you can have is 43%, although most mortgage lenders prefer percentages much lower than that.
Always shop around.
While only about half of borrowers consider a quote from more than one lender, it pays handsomely to do so. One recent Freddie Mac study found that getting an extra quote lowered homebuyers’ average interest rate by 0.166 percentage points, the equivalent of $400 in annual savings on a typical-sized mortgage.
Don’t forget traditional banks.
MONEY’s list focuses on online mortgage lenders rather than brick and mortar lenders, but to make sure you find the lowest possible interest rate you should also check with traditional banks, such as Bank of America, JP Morgan Chase and Wells Fargo, as well as local banks and credit unions that operate just in your area. What local lenders lack in technology they often make up for in knowledge of the local real estate market. This may translate into a lower interest rate, a smoother closing, or both.
Beware of prepayment penalties.
If you’re looking to refinance your home, check with your current mortgage company to see if there’s a penalty for paying the loan off before it comes to term. Some mortgages, mostly those originated prior to 2013, impose hefty prepayment penalties. You want to make sure any advantage gained by refinancing your mortgage won’t be overshadowed by these penalties.
Avoid the common mistakes.
Refinancing your home is just as complex as applying for a primary mortgage. When asked about the biggest mistake people make when refinancing, Gumbinger identified “confusing cash-flow improvement with actual savings.” When refinancing, you need to consider the long-term costs over the life of not one loan term but two.
Another mistake is believing that the lowest interest rate will create the biggest savings. “Certainly it will help,” says Gumbinger, “but getting the right product and loan term will bring the greatest value.”
The 7 Best Mortgage Refinance Lenders of 2020
We’ve listed seven of the top online mortgage refinance companies of 2020 below, plus two lending marketplaces. These companies made our list for many reasons, but we gave more weight to factors such as a variety of products, commitment to customer service, and pricing transparency. We focused on lenders that operate online, since many consumers today prefer this method over traditional banking.
While we hope this list is a useful starting point, research shows it pays to get quotes from several lenders. In addition to the companies mentioned here, you should also check what traditional national and local banks and credit unions offer. Remember, it’s important to get several refinance quotes before choosing a lender. Every refinance provider charges different fees, offers different perks and has different timeframes for closing. With that in mind, our aim with this guide is to make you an informed, empowered shopper.
- Best Customer Service – Quicken Loans
- Fastest Closing Times – Figure
- Best for Government-Backed Options – Freedom Mortgage
- Best Online Platform – Rocket Mortgage
- Best Variety of Products – PennyMac
- Best Comparison Tools – LendingTree, Credible
Mortgage Refinance Lender Reviews
Quicken Loans Review: Best Customer Service
You might think the largest mortgage lender in the United States is a traditional brick and mortar bank. It’s actually Quicken Loans. The mortgage lending company surpassed banking giants JPMorgan Chase and Wells Fargo in 2018. During the financial crisis, Quicken invested in developing its online application software and centralized its call centers at a time when its competitors were busy recovering. The company has experienced tremendous growth over the years. In 2018, J.D. Power ranked Quicken #1 in Customer Satisfaction for Primary Mortgage Origination for the ninth year in a row.
While Quicken is known for its customer service, it also offers competitive interest rates and a variety of refinancing options, including cash-out refinancing, FHA loans, fixed and adjustable-rate loans, 30 and 15-year loans, HARP loans and VA loans for veterans.
A unique feature offered by Quicken is a product called YOURgage. With this option, you get to choose the term (or length) of the loan, from a minimum of eight years up to 30 years in yearly increments, which is great if you are looking to refinance and shorten the term of your loan at the same time. For example, if you are 10 years into your mortgage and want to refinance at a lower rate, you could choose a 20 year term instead of the traditional 30. In this scenario you’ll pay off the mortgage in the same time period for less. With this program, you have the option of refinancing up to 97% of your primary home’s value, with a top limit of $510,400.00.
Figure Review: Fastest Closing Times
Figure only offers mortgage refinancing, not purchase loans. But with the average 30-year mortgage rate under 4%, that’s a smart move for lots of homeowners. The application is smooth and seamless, with the whole process being done online.
Specializing in cash-out refinancing, Figure allows you to borrow up to 80% of your home’s value, with up to $500,000.00 available in cash back. The company also offers Home Equity Lines of Credit and Student loan refinancing.
Freedom Mortgage Review: Best for Government-Backed Options
Freedom Mortgage specializes in government-backed mortgages like FHA loans, VA loans, HARP loans, and USDA-backed loans. Because of this the company is ideally suited to help borrowers sift through the government paperwork required during the refinance application process.
Freedom has a conventional refinance option, but its strong point is refinancing VA, FHA and USDA loans. For VA and FHA loans, there is a “streamline” process that has fewer paperwork and documentation requirements and can help speed up the application process. However, in order to qualify for these loans, your primary mortgage must also be through one of these programs (i.e. you can only refinance an FHA loan with another FHA loan). The advantage of government backed loans is they normally have more lenient credit score requirements, accepting FICO scores as low as 580.
Keep in mind though, there are drawbacks. Low down payment FHA loans require borrowers to pay “private mortgage insurance,” an extra fee that typically amounts to 0.2 to 2% of your mortgage, which could result in higher monthly payments.
Freedom is one of the top FHA lenders by volume, so if you are looking for a company that has a strong knowledge of how to secure one of these loan products, Freedom Mortgage could be a good option.
Rocket Mortgage Review: Best Online Platform
Developed in 2015, Quicken’s Rocket Mortgage was the first entirely online source for mortgages. It offers a different product and application experience from the traditional Quicken Loans mortgage, which is why we’re listing Rocket separately.
Unlike applying for a mortgage with Quicken Loans, where you speak with a banker who walks you through the process, Rocket Mortgage delivers the entire refinance experience through its online platform. While traditionally you need to gather information like W-2s and tax returns, Rocket Mortgage can find many of these automatically, once you hand over key personal information like your Social Security number and bank account log-ins. Quicken claims that you should be able to complete the process and get a quote in as little as eight minutes using Rocket Mortgage.
With Rocket, you choose your refinancing goal. Once on the website, just pick whether you want to get a cash-out, shorter-term or lower payment refinance and start adding your information to get an estimate.
PennyMac Review: Best Variety of Products
PennyMac has been in business since 2008 and is currently one of the top mortgage lenders in the country, serving over a million customers. In addition to its customer service, PennyMac stands out for its variety of refinance options.
Customers can choose from conventional fixed and adjustable-rate refinances, cash-out loans, Jumbo, FHA, USDA, and VA refinance, and a product called the Flex Term loan. With the latter, you can choose the term length of your loan. PennyMac also provides information and tips to help you decide which type of loan is your best option.
Applying for a loan is easy. Using their online Mortgage Access Center (M.A.C.) you can enter your information and start the process. Other online tools include a Home Value Estimator, Refinance Loan Calculator and Real Estate Concierge Service (assistance for buying or selling your home).
Best Comparison Tools
As mentioned, it’s important that you shop around before settling on a refinance company. To make this a little easier, we’ve included a brief overview of two of the top online lending marketplaces. Remember, by doing a little comparison shopping you can make sure you’re getting the best rates.
LendingTree offers a large variety of loan options, from home and auto, business and personal loans. Among their refinancing products, they offer conventional fixed and adjustable-rate loans, and cash-out loans. The company offers a variety of online tools in addition to its online application process, such as a refinance calculator and a Mortgage Comparison Shopping Report which will compare mortgage rates and provide information on the pros and cons of each type of refinance option. LendingTree also offers educational tools to help customers who may be struggling with debt or bankruptcy.
Credible helps consumers compare mortgage refinance rates. Credible has an intuitive interface and some of the best and easiest-to-use online comparison tools, making the refinance process straightforward and easy. Credible also claims you can pre-qualify in as little as three minutes. Among the products you can look for on their website are conventional Fixed and Adjustable Rate and Cash Out loans. All the steps, from applying to uploading documents to closing, are done online.
How We Found the Best Mortgage Refinance of 2020
To compile our list of the best mortgage refinance lenders, we looked at lenders’ customer service, innovation, speed, product variety, and price transparency. We also considered several years’ worth of JD Power and Associates rankings. Additional information was adapted from our partner website ConsumersAdvocate.org. For more detailed information on mortgage refinancing and company reviews, you can see their ranking of the Best Mortgage Refinance Companies. ConsumersAdvocate.org and Money.com share the same corporate parent.
Refinancing a mortgage can be a lengthy process. It’s not a simple transaction like adding a shirt to an online shopping cart. There are many steps and you’re required to provide a lot of personal information. That’s why customer service is so important, especially if this is your first time refinancing a home.
The financial jargon in the mortgage industry can be overwhelming. There are many different fees, and if it’s been a while since you got your first mortgage, you might need a refresher. That’s why it’s important to choose a lender that’s committed to price transparency and is happy to explain to you the different fees that will be rolled into your loan.
We live in the digital age, and many people today prefer to do as much online as possible. Lenders who have changed with the times and made online applications seamless earned a spot on our list.
Companies that offered a variety of refinance products made our list because of the flexibility they offer their customers.
Summary: Best Mortgage Refinance Lenders of 2020
Refinancing your mortgage can be a great way to reduce your monthly mortgage payment, change the term of your loan or lock in today’s historically low mortgage rates. However, it’s still a process that usually involves paying fees, filling out paperwork, and working closely with a lender.