Best Mortgage Refinance Lenders of February 2023

Why refinance your mortgage?

There are multiple reasons to refinance your mortgage. People usually refinance to save money, either in the short run or the long run, and sometimes to borrow against their equity. Here are some of the main reasons to refinance:

To get a lower mortgage rate. If mortgage interest rates fall after you get the loan, you may be able to refinance to a lower rate. This can result in smaller monthly payments.

To shorten the term. Refinancing from a 30-year mortgage to a shorter-term loan (15 or 20 years, most commonly) might increase your monthly payment even with a lower interest rate. However, it decreases the overall interest you pay over the life of the loan.

To get rid of mortgage insurance. When you buy a home with a conventional loan and a down payment of less than 20%, you have to pay for mortgage insurance. Refinancing is one way to stop paying private mortgage insurance, and it's the only way to get rid of FHA mortgage insurance.

To replace an adjustable-rate mortgage, or ARM, with a fixed-rate loan. Rather than enduring the uncertainty of annual interest-rate adjustments with an ARM, you might refinance to a fixed-rate loan so you don't have to worry that the rate will rise.

To get your hands on equity. With a cash-out refinance, you borrow more than your current loan balance and take out the difference in cash. A cash-out refinance is a popular way to pay for home improvements.

» MORE: Compare today's refinance rates

Common refinance requirements

In order to qualify for a mortgage refinance, you will need to meet the criteria set by your lender and loan program:

Credit score. A higher credit score can help you secure the lowest refinance interest rate. Government-backed refinance loans typically have lower credit score requirements than conventional loans. With an FHA cash-out refinance, the minimum score requirement is 500, for example. With a conventional refinance, it’s at least 620. But lenders are permitted to set higher minimums if they choose.

Debt-to-income ratio. Your debt-to-income ratio is the portion of your gross income that goes to paying your debt, including your current mortgage. Many lenders require a DTI below 36%. You can refinance a mortgage with a higher DTI, but you may pay a higher interest rate.

Home equity. Your home equity is the value of your home minus what is owed on the mortgage. The amount of equity you need to refinance varies by lender and type of mortgage, but 20% equity is a common requirement.

Refinance wait period. While you can refinance as often as you want, some lenders require a “seasoning” period between loans. With a conventional cash-out refinance, for instance, you will have to wait six months. If you are refinancing an FHA, VA, or USDA mortgage, the waiting time varies between six and 12 months.

Types of mortgage refinances

Whether you’re looking to refinance a conventional or government-backed mortgage, there are generally four types of refinances:

Rate and term refinance. A rate-and-term refinance is exactly what it sounds like: you refinance your mortgage to reduce the interest rate, shorten the term of the loan, or both.

Cash-out refinance. A cash-out refinance is when you replace your mortgage with a new one for more than your current loan balance. The difference goes to the homeowner as cash that can be used for home improvements or other financial responsibilities. There are conventional, as well as FHA and VA cash-out refinancing options.

Streamlined refinance. The FHA, VA and USDA offer streamlined refinancing options that may allow you to skip the usual appraisal and credit check, saving you time and money. The FHA streamline and VA IRRRL both require that the refinancing result in a financial benefit: either a reduction in your monthly payment or interest rate.

Renovation refinance. A renovation refinance loan works somewhat like a cash-out refinance, in that you take out a larger loan than what you previously owed. The proceeds from the refi go toward fixing up your home. With some renovation refinances, like the FHA 203(k) loan, the lender actually directly pays your contractor. Renovation refinances sometimes allow you to borrow against the value of the home once the upgrades are completed rather than its current value. 

Choosing a refinance lender

Whether you’re looking for the reach of a traditional bank or the personalized service of a credit union, always shop multiple lenders and compare the interest rate and terms each lender offers. Even though it might be easy to refinance with your current mortgage lender, it may not offer the best deal.

Everything can be negotiated. Your lender is required to provide you with a Loan Estimate after you apply to refinance. Compare fees listed under the "origination charges" on the document. If you are not comfortable with a fee, negotiate for it to be removed or reduced.

What is the real cost of your new mortgage going to be? Look at the annual percentage rate, or APR. This number covers all the costs of the mortgage including the interest rate and fees.

» MORE: Compare top refinance mortgage lenders

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