Mortgage refinance rates are historically low, and many homeowners could save by refinancing to a lower mortgage rate. At the same time, mortgage lenders are less willing to take on risk because of market uncertainty prompted by the coronavirus. Credit standards may be tougher amid the COVID-19 crisis, but homeowners who qualify can take advantage of savings or the opportunity to tap home equity.

Use this guide to learn how mortgage refinancing works and how you can qualify with the right lender.

Locking in a low mortgage rate today can save you thousands over the life of your loan. Compare your mortgage rate offers with national average trends.

Methodology: U.S. News conducted an in-depth review of the top national mortgage lenders to recommend the best refinance lenders offering direct-to-consumer home loans. Considerations included product offerings, customer service ratings and qualification requirements.

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

Could refinancing your mortgage save you money? Try U.S. News’ Mortgage Refinance Calculator to see if refinancing makes sense.

Mortgage rates hit an all-time low in April 2020 following the Fed’s cut in the benchmark interest rate. Further interest rate drops are possible, but if you’re ready to refinance, it’s a good idea to lock in the lowest mortgage refinancing rate now at historic lows. The best refinance rates may be available today.

A mortgage refinance trades your current mortgage for a new one. The lender pays off the old home loan, and you begin making payments on the new home loan. You’ll get a new interest rate and terms, and can make other changes to the loan, such as increasing your balance to tap home equity or trading your adjustable-rate mortgage for a low fixed-rate mortgage.

There are three main mortgage refinance loan types: rate-and-term refinance, cash-out refinance and cash-in refinance.

Rate-and-term refinance is the most common type of mortgage refinancing. You’ll take the balance of your current mortgage and borrow at a different rate and terms. You should get a lower interest rate, and you can shift from an adjustable-rate loan to a fixed-rate loan (or vice versa). For example, you could refinance your 30-year adjustable-rate mortgage to a 15-year fixed-rate loan.

Cash-out refinance can offer a change of interest rate and terms, but you’ll increase your balance with this type of mortgage refinance. An alternative to a home equity loan, cash-out refinancing gives you cash at closing, which is added to your mortgage balance.

Cash-in refinance is less common than rate-and-term refinance or cash-out refinance. You’ll bring cash to the closing table to pay down your loan balance with this type of mortgage refinance. It’s an interest-saving option if you’ve got the cash to do it, as this type of loan can offer a lower mortgage rate, shorter mortgage term, or both.

A refinanced mortgage is essentially a brand-new mortgage loan that comes with closing costs. Expect to pay closing costs similar to your original mortgage, generally around 2% to 3% of the loan amount. You’ll be responsible for lender fees, such as the origination fee, discount points you pay for a lower interest rate and third-party fees including inspection and appraisal fees.

Do the math: for a $300,000 home loan refinance, you should plan on $6,000 to $9,000 in closing costs. No-cost refinancing may be available, but if you think it sounds too good to be true, you’re right: expect to pay a higher interest rate with this type of loan or have the closing costs rolled into the loan. Either way, you’re going to pay for it.

Mortgage refinancing makes sense when you can use it to save on interest, access home equity, or both. Consider some of the reasons people refinance a mortgage:

Lower interest rates are a popular reason for refinancing. Whether market mortgage rates have fallen or your financial picture has improved, you can save if you’re able to qualify for a lower interest rate on a mortgage loan.

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

Shorter loan terms such as a 15-year fixed-rate mortgage can also offer interest savings and allow you to pay off your mortgage sooner. If you get a lower mortgage rate, you could save on interest in two ways: by shortening the life of the loan and lowering how much you pay in interest each month.

Longer loan terms such as a 30-year fixed-rate mortgage allow you to get a lower monthly payment. Generally, a mortgage with longer terms will have a lower monthly payment than a mortgage with a shorter term. But the longer you take to pay off your loan, the more interest you will pay overall.

Converting from an adjustable rate to a fixed-rate loan locks in your interest rate, ideally at a lower rate. If mortgage refinance rates are low and you plan to stay in your home for a few years. Conversely, some homeowners who plan to sell their homes within a few years choose to convert from fixed-rate loans to adjustable-rate mortgages. This makes sense for homeowners who can access lower rates on an adjustable-rate mortgage and want to save on interest in the meantime.

Cash-out refinancing converts your home equity 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. But exercise caution tapping your home equity: it doesn’t make sense to finance short-term expenses with long-term debt.

Getting approved for refinancing is slightly more complicated than regular mortgage approval. You’ll need to prove your creditworthiness and income like you would with any other mortgage, but there’s another layer with refinancing: home equity.

Generally, home loan refinance lenders require a minimum credit score of 620 FICO for standard loans. But you could qualify for refinancing with special programs such as government-backed loans with a lower credit score. Before you apply for a refinance, put yourself in the best position to get a good rate and terms. Check your credit and identify errors and areas of improvement. Pay down any balances and correct errors before you submit any refinancing applications.

You’ll need sufficient income to qualify for your refinance. If your income has stayed the same or increased while your home loan balance decreased, you should have no problem with approval. However, if your income is lower or you plan to add to your balance with a cash-out refinance or combining a first and second mortgage, expect to take a closer look at your income for approval. Most lenders won’t approve a loan with a monthly mortgage payment that’
s more than 30% of your total gross monthly income.

Lenders assess your loan-to-value ratio to determine risk. LTV measures how much you owe on your home loan compared to your home’s market value. Typically mortgage refinancing companies look for at least 20% home equity and an LTV ratio up to 80%.

Choosing the right lender is key. Consider lenders based on mortgage loan products, interest rates and customer service.

Mortgage lenders offer a variety of refinancing loans, so choosing the best mortgage refinancing company starts with finding one that offers the refinancing product you want. Whether you’re looking for Fixed-rate loans or government-backed mortgage refinance including FHA, VA and USDA loans, you’ll need a lender that can meet your needs for loan products. Common mortgage refinancing products include:

Once you’ve found the right product, find the right price. Prequalify with a few mortgage refinance lenders to compare mortgage rates and find out whether you meet minimum credit score requirements. 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 offer a lower monthly mortgage payment and 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.

Mortgage refinancing is a long-term commitment; make sure you’re choosing a lender that can offer good customer service. Read reviews, consumer ratings and complaints to find out what other consumers have to say about a lender. Check with the Better Business Bureau to find mortgage lender ratings and visit the Consumer Financial Protection Bureau’s consumer complaint database to learn about common lender complaints. You can also consider your own experience: you can refinance with your current mortgage company if you’re happy with their service and they offer a competitive loan product.

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