Mortgage Refinance Lenders

Mortgage interest rates are historically low, and the conditions are ideal for U.S. borrowers to refinance a home loan. Often, homeowners refinance to get a better interest rate, to access cash, to lock in a low fixed rate or to shorten their loan term.

A home is the single largest asset many consumers have, so the stakes are high when refinancing. With this guide, you can learn how mortgage refinancing works and how to choose the right lender.

How Mortgage Refinancing Works

A mortgage is a loan from a bank or other lender that helps a borrower purchase real estate. The property you buy is used as collateral, so if you default on the loan, the bank can seize it and sell it to recoup some or all of its losses. A mortgage refinance trades your current mortgage for a new one. The lender pays off the old loan, and you begin making payments on the new loan.

Types of Mortgage Refinancing Loans

Conventional Mortgages

Most mortgages are conventional. Banks and other private lenders issue conventional mortgages, which tend to have the toughest underwriting requirements. They can be more difficult to qualify for than government-backed loans.

Government-Backed Mortgages

FHA. As with conventional loans, Federal Housing Administration loans are issued by private banks and other lending institutions. However, they have one key difference: The federal government guarantees FHA loans. With government backing to reduce lender risk, an FHA loan is easier to qualify for than a conventional loan. FHA loans require as little as 3.5% as a down payment.

VA. U.S. Department of Veterans Affairs loans help service members, veterans, certain members of the reserves or National Guard, and some surviving spouses purchase homes with little or no down payment and without private mortgage insurance. The Interest Rate Reduction Refinance Loan program allows those who already have a VA loan to refinance into a new VA loan. For an IRRRL, you will need to pay a funding fee of 0.5% of the new loan amount.

USDA. U.S. Department of Agriculture loans help low- and moderate-income borrowers purchase homes in eligible rural areas. For a USDA loan, you must meet income and other requirements. The USDA also offers refinance loans to USDA direct or guaranteed loan borrowers.

State and Local Mortgage Programs

Special mortgages may be available to residents of a particular state or city, or to individuals in certain professions, such as nurses, teachers, firefighters or police officers.

Loan Terms

A mortgage loan term is the amount of time during which a borrower makes monthly payments toward a home loan. Most mortgages are designed to be paid off in 15 or 30 years, but other loan terms are available. Generally, mortgages with longer terms will have lower monthly payments than mortgages with shorter terms. However, the former may cost more in the long run, as the longer you take to pay off your loan, the more interest you will pay overall. Mortgages with shorter terms usually come with higher monthly payments but lower overall interest.

Interest Rates

The two main types of interest rates on mortgages are fixed and adjustable.

With a fixed-rate loan, you will pay the same interest rate for the duration of the loan. Fixed-rate loans offer predictability, as your payment remains the same even if market conditions push interest rates up. The disadvantage is that if rates fall, you can’t take advantage of potential savings.

Also known as an ARM, an adjustable-rate mortgage has an interest rate that changes with a benchmark rate, such as the prime rate. The introductory interest rate is set for a period of time, such as five years, after which the interest rate can adjust up or down, depending on market conditions. While ARMs allow buyers to take advantage of low teaser rates, they can be riskier than fixed-rate loans.

Following the introductory period, your lender will periodically recalculate your interest rate based on prevailing market conditions. Your interest rate is subject to change at predetermined intervals, perhaps as often as once per year.

The interest rates for ARMs are based on the benchmark rate of the lender’s choice. Here are three common benchmark rates:

• One-year Treasury constant maturity rate
• 11th District Cost of Funds Index, or COFI
• London Interbank Offered Rate, or Libor

Your lender will charge an interest rate that’s higher than the market indicator, called a margin. For example, if the Libor index puts interest rates at 4%, and your mortgage agreement allows for a margin of 3%, then your interest rate will be 7%.

You can choose from several different types of adjustable-rate mortgages. The most common are:

Hybrid ARMs. Hybrid ARMs have both fixed and adjustable interest rates. They start with a fixed rate, then switch to an adjustable rate after a predetermined period of time.

Hybrid ARMs are often described with two numbers. The first is the period of time that the mortgage stays at a fixed rate, and the second indicates how often the interest rate adjusts after the initial fixed-rate period. For example, a 5/1 hybrid ARM maintains a fixed interest rate for five years, then converts to an interest rate that readjusts every year.

Interest-only ARMs. With an interest-only, or IO, ARM, the borrower only pays interest on the loan for a predetermined period of time. After that period, principal and interest payments apply with an adjustable rate.

For example, if you take out a 5/1 IO ARM for $150,000, with an interest rate of 4%, your payment will be $500 per month for the first 60 months. If your interest rate goes up to 4.25% after 60 months, your payment will increase to $813. If, however, your rate jumps to 6%, your new monthly payment will be $966.

The amount your rate increases depends on your loan terms and market conditions.

Payment-option ARMs. With this type of ARM, you can choose from a number of different payment options each month. The required minimum payment is periodically reset, based on the outstanding loan balance and other terms. This recalculation period is built into the loan.

Typically, the payment options include:

• A traditional payment. A traditional payment pays the principal, plus interest on that principal. The payment is based on a set loan term, as with any other mortgage. In this case, the loan balance will decrease with each payment.
• An interest-only payment. You will pay the monthly interest on your loan without paying down the principal. The outstanding principal balance will remain the same with each payment.
• A minimum, or limited, payment. Your lender may set a minimum payment amount or allow you to pay what you can afford. If you pay less than the interest due, then the unpaid interest will be added to your loan balance. When this happens, the amount you still owe will increase, even though you have made a payment.

ARM Caps

Some adjustable-rate mortgages have limitations in place to prevent your payment from suddenly skyrocketing. For example, your ARM may cap:

• How much the rate can rise with each adjustment
• The overall interest rate
• How much your payment can increase

Protections like these can help you avoid a loan you can’t afford to repay, but they don’t necessarily help you financially in the long run. For example, if there is a cap on the increase in payment amount, then any interest that accumulates above that amount will be added to the loan balance and amortized. That means you’ll pay interest on interest.

Additional Refinancing Costs

A refinanced mortgage is essentially a brand-new mortgage that comes with closing costs. Here are some of the fees you may have to pay.

Property Evaluation Fees

Appraisal fee: An appraisal protects the lender from lending more for a property than it is worth. Your lender will want a professional assessment of your property’s value to determine the amount you can refinance. The lender will typically pass on the fee to you.

Inspection: The lender may require a home inspection, a septic inspection, a termite inspection or a water quality test.

Flood determination assessment: A flood determination assessment establishes whether a property is located in a flood zone. If you refinance with the same lender that issued the original mortgage, the lender may not require a new flood determination assessment.

Loan Fees

Application fee: You pay lenders an application fee for taking the time to review your application.

Credit report fee: Your credit score and credit history are major factors the lender uses to determine your loan terms. Your lender will purchase a residential mortgage credit report, which includes data from all three major credit reporting agencies.

Origination fee: The origination fee covers the administrative costs of starting a new mortgage.

Attorney fees: Attorney fees pay for having an attorney review the terms of your mortgage agreement. An attorney review is not required in all states.

Mortgage broker fee: If you use a mortgage broker to help you find the best mortgage for your needs, you must pay the broker a fee. Broker fees may be charged as a closing cost or rolled into your loan.

Prepaid interest: Interest on a mortgage begins accruing when you close, so most lenders will ask you to pay upfront for that interest.

Discount points: Discount points are fees you voluntarily pay upfront in exchange for a lower interest rate. Each point costs 1% of the total value of your loan. For example, $1,000 would be the cost of one discount point on a $100,000 loan. How much one discount point can reduce your interest rate depends on your lender and prevailing market conditions at closing.

One point typically lowers your interest rate by one-eighth to three-eighths of a percentage point; one-quarter of a percentage point is common. Generally, discount points are worth purchasing, provided that you plan to own the home long enough to break even on the cost of those points. For example:

Title Fees

Lender’s policy title insurance: Lender’s policy title insurance protects the lender in case the title on your home has a legal problem. Using this insurance policy never becomes necessary unless the title company fails to discover a previous claim on the property.

Owner’s policy title insurance: Similar to lender’s policy title insurance, owner’s policy title insurance protects you, the mortgage borrower, from overwhelming legal costs in case of a challenge to your title on the property. Owner’s policy title insurance is usually optional.

Mortgage Insurance Fees

Private mortgage insurance: If you refinance a mortgage with equity collateral of less than 20%, you will likely need to pay for private mortgage insurance. Private mortgage insurance, or PMI, protects the lender in case the borrower fails to pay off the loan. If you’re buying PMI, you’ll have to pay an application fee and either an upfront first-year or lump-sum payment.

Fees for Government-Backed Mortgages

FHA and USDA borrowers pay two kinds of mortgage insurance fees or premiums: upfront and annual. VA borrowers don’t pay mortgage insurance but do pay a one-time funding fee that helps offset program costs, including defaults. All three programs permit upfront costs to be rolled into the loan.

Reasons to Refinance a Mortgage

People refinance mortgages for various reasons.

To Secure a Lower Interest Rate

Some borrowers refinance their mortgage to lower their interest rate. Market rates may have fallen since you got your loan, or your financial history and assets may have changed since then. Many consumers see improvements in their credit history and salary once they’re a few years into a mortgage and can qualify for better terms.

Lowering your interest rate will reduce your monthly payments, provided you do not increase the amount borrowed or reduce the number of years left on the loan. A lower rate might help you build equity in your home faster than you would with a higher interest rate.

For every $100,000 you owe, 1 percentage point increases or decreases your payment by more than $50 per month on a 30-year loan. If you owe $250,000 at 5% and you refinance to 4%, you can save about $150 per month. Over 30 years, your savings would amount to more than $53,000.

To Shorten Your Loan Term

Refinancing can shorten the term of your loan and allow you to pay off your mortgage sooner. If interest rates have fallen since you started your original mortgage, you could shorten the life of the loan without increasing your payment significantly or at all.

For example, with a 30-year fixed-rate mortgage for a $150,000 loan at an interest rate of 7%, your monthly principal and interest payment is $997.

If you’ve been making payments for five years, your loan balance is $141,200. If you can qualify for a 15-year mortgage at 4.5%, the monthly payment on your new loan would be $1,080. If you can increase your monthly payment on the refinanced mortgage by $83, you can shave 10 years off the original loan term.

To Convert From an Adjustable Rate to a Fixed Rate

Adjustable-rate mortgages allow you to save money on interest rates when the interest market is down, but they come with the risk of higher interest rates in the future. You could end up paying a lot more with an ARM than you would with a fixed-rate mortgage if rates increase significantly. Many ARMs start at a low teaser rate to make them enticing, but later the rate increases. Some homebuyers with ARMs will choose to refinance to a fixed-rate mortgage before the end of the introductory period to avoid rising interest rates.

Conversely, some homeowners who plan to sell their homes within a few years choose to convert from fixed-rate to adjustable-rate mortgages. This makes sense for homeowners who want to save on interest in the meantime.

To Pay for Home Improvements or Consolidate Debt

A cash-out refinance converts the equity you have in your home into cash that you can use to pay for home improvements or pay off debts, such as a second mortgage or a high-interest credit card balance.

If you’ve been paying down your mortgage for a long time, you’ve built up equity in your home. With every payment you make, your lender owns less of your home and you own more. Equity has value, which means it can be converted into cash when you use it as collateral for another loan. This not only gives you cash to pay off debts, but it also consolidates your debts into a new loan with a single monthly payment.

“Many of our customers today want to refinance for cash,” says Stephen Moye, senior loan officer at Citywide Home Loans. However, some consumers who use a cash-out refinance to pay off credit card debt go out and run up their credit card balances again, Moye cautions. Because of this risk, a clear financial plan is critical.

To Change Loan Types

Since 2013, FHA borrowers who make a down payment of less than 10% on their initial mortgage are required to pay mortgage insurance premiums for the entire life of the loan. Borrowers who qualify may choose to refinance to a conventional mortgage to eliminate this cost.

To Add or Remove a Borrower

Marriage, divorce, and the formation and dissolution of other partnerships can be the impetus to add or remove someone on a loan. One way to accomplish this is to refinance.

Before You Refinance Your Mortgage

Before you apply for a home loan refinance, put yourself in the best position to get a good rate and terms.

Improve Your Credit Score

Your credit score and credit history are major factors that lenders consider when they determine which loan you are eligible for and at what rate. Before you apply:

• Request a free copy of your credit report from all three major credit bureaus by visiting AnnualCreditReport.com.
• Check your credit report for errors. In a Federal Trade Commission study, 1 in 4 Americans had errors on their credit report that were potentially serious enough to drag down their credit score. Follow each bureau’s process to request a correction.
• Get a free credit score from any source you have access to. Start with your own bank or credit card issuer. Discover offers a FICO credit score from Experian, and Capital One lets you see your TransUnion VantageScore 3.0, even if you aren’t a customer. No matter where you check your own credit score, this won’t hurt your score. However, remember that all free credit scores can differ from what your lender sees.
• Prequalify with a couple of lenders to find out what credit score bucket they place you in. For example, some lenders will consider a score of 680 to be good, while others start the good range at 690.
• Spend some time cleaning up your credit to try to push your score into the next tier.
• Avoid applying for other credit products before refinancing. Multiple inquiries in the same time frame for different types of credit can reduce your credit score because this can look like you’re having financial difficulties.

Know Your Home's Value

Get an idea of what your home is worth before you spend time and money applying for a new loan. If you want to access equity with a cash-out refinance, for example, you will need to know if you have enough equity to get the amount you need. You can get an idea of your home’s worth before you apply. Check online real estate sites such as Zillow, and look for recent sales of nearby comparable homes.

The Mortgage Refinancing Process

1. Prequalification and preapproval: Prequalification is a way to find out how much you may be able to borrow. It is based on basic information you provide and is nonbinding.

Preapproval is a conditional offer from a lender. You’ll provide detailed information about your assets and income. If you later decide to apply for the loan, the lender will reverify your information.

2. Application: You can get started with mortgage refinancing by filling out a loan application. This application will ask you for basic information:

• Name
• Address
• Employer
• Annual income
• Social Security number (as part of a credit check authorization)
• Property address (if different from your primary address)
• Home type
• Property value estimate
• Homeowners association dues associated with the property
• Total loan amount desired

“Submitting multiple mortgage applications will not hurt your credit score if you do it correctly,” explains credit expert John Ulzheimer, formerly of FICO and Equifax. “First, FICO scoring models ignore mortgage-related inquiries for the first 30 days after they are made. Then, afterward, you’ve got a 14- to 45-day window to rate-shop, during which all inquiries from mortgage lenders will be counted as a single hard inquiry where your credit score is concerned."

“The rate-shopping window depends on the credit-scoring model the lender uses,” Ulzheimer adds. “The newest FICO score allows 45 days. Older models allow 14 days. VantageScore allows 14 days to rate-shop. (VantageScore does not give the initial 30-day buffer.) Unless you know for sure that the lender uses FICO, make your applications within two weeks.”

3. Required documentation: Along with your application, your lender will need documents to verify your identity, assets, employment status, income and other data. These documents typically include:

• W-2s for the past two years
• Recent pay stubs (at least 30 days)
• Your most recent federal tax return
• Two months of bank and investment statements; this includes your brokerage, 401(k), IRA, 403(b) and pension accounts, and any other accounts relevant to your mortgage application
• Earnings statements or 1099 forms from any businesses you own
• A complete list of your debts (credit cards, car loans, student loans, etc.)
• Canceled checks for your current rent or mortgage
• Recent Social Security or disability statements, if applicable
• Bankruptcy discharge paperwork, if applicable
• A certificate of eligibility, if you’re applying for a VA loan

4. Loan estimate: The law requires lenders to give you a loan estimate, which is their best estimate of what your loan might cost if the financial details in your loan application are verified and match what you provided. The lender must deliver this document within three business days of receiving your mortgage application.

The loan estimate is a three-page document that explains the interest rate, APR, monthly payment, total closing costs, and estimated taxes and insurance fees for the proposed loan, as well as other terms and details that can help you decide whether the loan is right for you. It is a standard form, so if you apply with multiple lenders, you can use the form to easily compare loans and choose the best one.

Your lender is only required to honor the specifics of your loan estimate for 10 business days. If you take longer than that to move ahead with the loan process, then changing market conditions may cause your lender to revise the terms of the loan.

5. Processing: After you turn in your application, receive a loan estimate and notify your lender that you intend to proceed with the loan, a mortgage processor will order your credit report, an appraisal of the property you wish to refinance and a report on the title attached to that property.

The loan processor will verify your financial details, and if that person finds anything questionable, you will likely need to submit a letter of explanation to get the loan approved. Questionable financial details might include late payments on your credit report, accounts that have gone into collections or financial judgments.

Once all the questions are answered, the loan processor will submit a report to your lender.

6. Appraisal: An appraisal estimates the value of the property you wish to refinance. To determine the value of the property, a professional appraiser will take a number of factors into account, including the size of the home, its location, the amenities on or near the property, and the physical condition of the property.

The appraisal is an important factor that helps the lender determine your loan limit. The amount you can borrow is limited by the loan-to-value (LTV) ratio, or how much debt you have against the property compared with its market value at loan closing. The LTV limit is determined by the type of loan and the lender.

If you owe $70,000 on a home that now appraises for $100,000, your LTV is 70%. If your lender’s refinance LTV limit is 95%, you could refinance for $95,000, taking $25,000 in cash.

If, however, the appraisal comes in at $95,000, your loan may not exceed $90,250.

By law, the lender is required to provide you with a free copy of the appraisal upon its completion and no later than three days before closing on a first-lien mortgage. This ensures that you and the lender are both working with the same understanding of the property’s value as you settle on the terms of a loan.

7. Underwriting: After the mortgage processor sends your application details back to the lender, an underwriter must determine whether the loan is acceptable.

If the lender wants more information before making a decision, the application will be suspended, and the lender will ask you to supply more details and documentation.

If the loan is acceptable upon submission, the lender will approve it.

8. Closing disclosure: By law, your lender must give you a closing disclosure no later than three business days before finalizing your loan. This disclosure is a five-page form detailing all the terms of your mortgage. It includes projected monthly payments, closing costs and length of the loan.

The closing disclosure is similar to the loan estimate, and it is meant to confirm that the loan you sign is the one you expected. Compare the two documents before finalizing your loan to see whether any terms or fees have changed from the time you submitted your application and, if so, by how much.

Double-check all the details on the closing disclosure to ensure they are correct. Federal law limits how much certain charges can differ from your loan estimate. It’s always fine if fees, not credits, drop, but if any are higher, ask the lender why.

Visit the Consumer Financial Protection Bureau’s website for more information on fee tolerances.

9. Closing: At closing, you will sign the legally binding documents that put the mortgage into effect. In most cases, you will meet your lender’s representatives in a real estate office, a mortgage broker’s office or a lawyer’s office.

When you close the mortgage, you will make a final review of all the documents, sign them and pay all closing costs on the loan.

You will need to bring:

• Identification documents for each borrower
• Proof that you have active homeowners insurance
• A cashier’s check for the amount due at closing

Choosing a Mortgage Refinancing Lender

Selecting a mortgage lender is an important financial decision. To find the best mortgage lender for your refinancing needs, focus on four key points:

• Product offerings: What financing options does this lender offer?
• Interest rates: Does this lender provide the most competitive interest rate for my financial situation?
• Closing costs: Does this lender have reasonable closing costs compared with other lenders that have similar refinancing offers?
• Customer satisfaction: What kind of experience did previous customers have with this mortgage lender?

Product Offerings

The more options a lender can offer you, the more likely you are to find one that fits your needs and financial situation.

For example, if you want a 20-year refinance, you’ll need to find lenders who offer more than 15- and 30-year options. Similarly, not all lenders have VA, USDA or FHA loans, or other special programs. You may also want a lender that lets you select from a range of adjustable-rate mortgage refinance loans.

Interest Rates

Shopping around allows you to compare lender interest rates side by side. They may look similar, but even a fraction of a percentage point can save you a significant amount of money over time, especially on a larger loan. As you compare interest rates, be sure to look at the APR, which reflects the interest rate and other costs, and represents the true annual cost of the loan.

Consider paying points. Ask your lender how much you can save by paying points. One point is equal to 1% of your loan, so buying one point costs $1,000 for every $100,000 you borrow. The rate reduction you get for your money varies from one lender to the next. Calculate your break-even point to figure out whether you could save more than the cost of the points in the time you expect to own the property.

Closing Costs

Some closing costs are negotiable, so it pays to look carefully at how much each mortgage lender might charge you. Lenders must compete for your business, so some may offer a better deal on closing costs than others.

Be wary of no-cost refinancing. If a loan is advertised as no-cost, this usually means that there are no upfront out-of-pocket costs. The additional fees are rolled into the loan or are reflected in a higher interest rate. In most cases, you will come out ahead by paying the fees upfront.

Choosing a lender with the lowest closing costs is a good idea, but think twice about working with a lender that lowers your closing costs only to raise your interest rate. The best refinance is the one that costs you the least over time, not the one that costs you the least today. Of course, some consumers will appreciate a lower cash obligation at closing.

Some lenders make it easy to estimate closing costs early in the mortgage process, while others don’t disclose their fees until later. You may find that comparing closing costs between lenders is easier to do after you have submitted a few applications and narrowed down the list of lenders you may want to work with.

Customer Satisfaction

Check mortgage lender ratings with an established ratings agency such as J.D. Power. Its 2018 U.S. Primary Mortgage Origination Satisfaction Study is a great starting point. The J.D. Power study scores lenders from 2 to 5, with 5 being “among the best” in each category.

You can use the Better Business Bureau to evaluate lenders not included in the J.D. Power study.

Best Mortgage Refinancing Lenders of 2019

• Fairway Independent: Best Lender for Customer Satisfaction
• Quicken: Best Lender for FHA Streamline Refinance
• Bank of America: Best Lender for No Minimum Loan Amount
• Guild: Best Lender for Up to $3 Million Loans
• Veterans United Home Loans: Best Lender for VA Refinance
• New American Funding: Best Lender for Cash-Out Refinance

U.S. News conducted an in-depth review of the top mortgage lenders in the nation to recommend the best mortgage lenders offering direct-to-consumer refinancing. Factors including product offerings, customer satisfaction and qualification requirements were considered.

No mortgage refinance company is perfect for every borrower, so recommendations are based on strengths in key areas.

When Refinancing Is Not a Good Idea

A mortgage refinance is not the best decision for everyone. Here are some reasons you might want to stick with the loan you have.

• You've had your mortgage for a long time. If you’ve had your loan for a long time, you reach a point where you’ve already paid most of the interest and are building equity. When you refinance a loan, you restart the loan amortization process and revert to paying more interest than principal.

• Your current mortgage has a significant prepayment penalty. Some lenders charge a prepayment penalty, which is a fee for paying off your loan early, even to refinance. If you refinance with the same lender, you can request that this fee be waived. If the fee can’t be waived, factor that into your break-even calculations.

• The fees outweigh the savings. If your objective is to lower your payment, the cost may be worth it. But if you want to lower your rate and save money over time, you’ll only achieve your goal if you own the property long enough for the savings to outweigh the costs. To figure out your break-even point, add up all the fees. Then, calculate how much you will save each month with the lower payment. Divide the total fees by the monthly savings, and that is the number of months before you will save more than you’ve spent. For example, if your loan fees are $3,000, and you expect to save $75 a month on your payment, you will break even in 40 months – more than four years – and start saving money after that.

• You plan to sell your home in the next few years. If you sell your home before you break even on the cost of a refinance, you could waste money by refinancing the loan. Do a break-even calculation to find out how long you need to stay in your home to see savings on a refinance.