What Is a Refinance Rate?

Refinancing a mortgage is the practice of replacing existing mortgage loans with ones that offer more beneficial terms—like an improved refinance rate. When you refinance, you have two courses of action: cash-out refinance or rate-and-term refinancing.

  • Rate-and-term refinance: This method earns property owners a better interest rate or improved loan terms, but for the mortgage balance. Think of it as an exchange of one loan for a more advantageous one.

  • Cash-out refinance: Now let’s say you’re looking for access to cash—for instance, to remodel your home or address other expenses. For that, you’d look to an option called a cash-out loan, or home equity loan. Keep an eye out for additional fees and higher interest rates because the lender is exposed to more risk. (And you won't be able to borrow unlimited money. Lenders usually restrict the maximum loan-to-value, or LTV, ratio.)

When and Why Should You Refinance?

There are various reasons why you might want to refinance. Often, homeowners think about refinancing when they see mortgage rates dipping below the one in their current home loan. If you can get a lower interest rate through a refinance, you might be able to save money with a lower mortgage payment. (But only might—more on that later.)

You might also want to refinance to a shorter term in order to pay off your home loan more quickly. Or perhaps you’re at the stage of homeownership where you have gotten enough equity in order to refinance into a loan without private mortgage insurance (PMI).

Other reasons to refinance might include pursuing that cash-out option, in which a homeowner could get access to cash from home equity to finance such major expenses as home improvements, college tuition, or investment property. This is especially tempting if your home value has dramatically increased.

Historic Refinance Rates

You can compare refinance rates offered in your area at a given time through various available online tools. It can be tempting to consider refinancing as soon as you see a low rate advertised. But it’s important to know that mortgage refinance rates change continually, so you may not end up getting a quote that matches the appealing one you saw.

Let’s look at historic mortgage rates throughout the last few decades for general context. Back before the financial crisis, the average 30-year fixed mortgage had an annual percentage rate of 6.48 percent, according to Investopedia. But after the crash, rates for the same kind of mortgage fell steadily—until the average was just 3.35 percent by the end of 2012.

From there, it started moving back up, and by the end of 2018, it sat at 4.54 percent, according to freddie mac’s chart that tracks the history since 1971.
Well, flash forward to the global coronavirus pandemic that slammed into the housing market—and the entire economy—beginning in early 2020. The Federal Reserve cut short-term interest rates to help boost the economy and lead to a shoring up of the mortgage financing system. The Fed’s two cuts in March of 2020 provide potential opportunities that triggered many homeowners to want to take advantage of the chance to refinance.

Refinancing at current rates could be a chance to replace an adjustable-rate mortgage with a low fixed-rate loan, access home equity with a cash-out-refinance, or eliminate FHA mortgage insurance. 

Assessing Refinance Rates vs. Your Current Mortgage

If you’re considering refinancing for a lower mortgage rate, you’ll need to consider the new rate against the cost of refinancing, which include closing costs and upfront costs such as credit checks, appraisals, and origination fees. These costs range between two and five percent of the loan amount, and will vary depending on your mortgage lender. Yes, these all add up—so a lower rate alone isn’t a reason to jump at the refinancing prospect. 

But once you consider these costs along with the interest rate you could qualify for, you can calculate how your monthly payment  might change. If there’s a measurable savings, you may want to go for it. Conventional thinking generally dictates it might be worth doing for a one percent savings or more—but you might find the specifics of your situation make it worthwhile even for a rate change less than that.

Beyond the fees and monthly payment, consider whether you have 20 percent equity or more in your home. If you have less equity, lenders typically require mortgage insurance to protect themselves in case you default, and that can be a pricey additional chunk to figure into your monthly payment. 
Your own mortgage refinance rate is mainly based on both your home equity as well as your credit score. If that credit score is strong and you can demonstrate secure income, you have a better chance of getting a competitive rate and having the whole refinancing process make sense for your situation.

note that plenty of factors outside your control—and outside your personal financial, credit, and employment picture—affect rates and the way they change over time. These include larger economic factors like inflation and job growth (not to mention a pandemic).

Should You Refinance?

When you’re considering refinancing, keep in mind not just the hard numbers associated with various loan types and loan options out there. But think about the break-even point of a mortgage refinance in terms of some of the softer considerations (that ultimately translate to dollars) associated with your homeownership.

For instance, do you expect your lifestyle to change substantially in the coming months or years? Might you be growing your family, or will your family size shrink as adult children leave the nest? If you might be selling and moving to a different home before you break even on the associated costs, you won’t have saved any money through the process of refinancing. 

If you’ve already paid off a big chunk of your home’s principal over a lot of years, refinancing also might be something to avoid: Refinancing into a new 20- or 30-year fixed-rate mortgage could cost you a lot in additional interest, even if you manage to reduce your rate significantly. In other words, try not to add too many years to your loan, because you’ll end up wiping out any interest rate savings by paying over a longer term.

In short, there’s a lot of context to consider apart from just the refinance rates alone when you consider whether refinancing is right for you.