Can You Refinance a Fixed Rate Mortgage?

Once you become a homeowner, you suddenly gain access to many new financial tools. One of which is refinancing your home.

But can you refinance a fixed rate mortgage? The quick answer is yes. 

Like many yes-or-no questions, however, this one needs some follow up. A refinance doesn’t come for free, and there are many decisions that go into preparing the best outcome for your financial goals. 

When Should You Consider Refinancing?

Refinancing is traditionally about timing, so be sure to add a “when” in front of “can you refinance a fixed rate mortgage.” 

You’re ideally looking at swapping your current mortgage for one with better terms for you. That means planning a refinance when: 

• Changes in interest rates provide an opportunity
• Your budget can handle the upfront closing costs
• You plan to remain in your home long enough to break even on the cost of refinancing

Market Interest Rates Overview

You may see various terms tossed around—prime lending rate, federal funds rate, prime interest rate—that inform the current starting point for loan interest rates. For mortgage refinancing purposes, it’s helpful to consider the current averages (as of April 2024) by loan type and term¹: 

• 6.27% for a 10-year fixed-rate refinance 
• 6.29% for a 5/1 ARM (5 years fixed rate, thereafter adjustable rate) refinance 
• 6.43% for a 15-year fixed-rate refinance 
• 6.55% for a 20-year fixed-rate refinance 
• 6.83% for a 30-year fixed-rate refinance 
• 6.99% for a 10/1 ARM (10 years fixed rate, thereafter adjustable rate) refinance 

Note these averages are calculated based on 700 – 740 FICO credit score and 80% loan-to-value (LTV) ratio. 

Understanding these figures and applying them to your situation may bring up a slew of questions like, “Can you negotiate mortgage rates?”. To start, it's important to grasp our position in the fluctuating pendulum of market interest rates. In short, you could say that today’s rates could be a bit better, but they could also be a lot worse. 

The prime rate, which provides a basis for calculating different loan rates, peaked in the early 1980s at 21%, dropping jaggedly over the years until hitting a record low of 3.25% in 2020 and 2021.² It’s rested since midsummer 2023 at 8.5%.³ Most experts predict a small drop, between 0.25% – 2.5%, by the end of 2024.^4,5,6

Evaluating Your Current Mortgage Terms

If you haven’t recently grabbed it for bedtime reading, pull out your current mortgage rate contract and take a look. Find out: 

• The payoff amount on your existing mortgage
• The mortgage interest rate
• Whether you have prepayment fees or penalties

As you start plugging numbers into refinance calculators and shopping around, it’ll also help to know: 

• Current property value—use an online calculator for a quick, free estimation
• How much you pay for property tax 
• Your homeowners insurance cost
• How long you plan to remain in your home

Steps to Refinance a Fixed Rate Mortgage

Once you decide now is the right time to refinance, you’ll want to take a few steps to help you find the best outcome. 

Determine Your Financial Goals

Again, let’s reframe the question. Rather than “can I refinance a fixed rate mortgage,” ask yourself, “why am I considering a refinance of my fixed rate mortgage?” 

The two most common goals—reducing the total interest payment and reducing monthly payment amounts—aren’t usually met at the same time outside of the most advantageous prime rate drops. Learning how to lower monthly mortgage payments is a complex process that involves taking into account market timing and your unique financial situation.

If you’re in danger of defaulting on your mortgage loan or are unable to meet critical needs because of your monthly payment amount, then a refinance is one way to construct a lower payment. Even still, it may cost you more in the long run. 

On the other hand, if you’re in a position to negotiate a lower rate or shorter term than your current mortgage loan, you may be able to save thousands in total interest paid. 

Prepare to Apply

Similar to a first mortgage, a refinance application starts with putting your best foot forward. 

Your interest rate won’t just be calculated based on the prime rate and your loan terms, but also on your profile as a borrower. In the weeks (or better yet, months) leading up to applying for refinancing, take steps to improve your: 

• Credit score – Find out your score, familiarize yourself with your credit report details, and dispute any errors. Make sure you’re current on all payments. Traditional mortgage lenders often require at least a 580 – 680 score, but the higher the better to land a lower interest rate.⁷

• DTI ratio – Your debt-to-income ratio reflects whether the amount of debt you’re carrying is reasonable in relation to your income level. Most lenders look for a DTI ratio of 43% or less, but 36% or under is better. You can improve DTI by paying off debt such as credit card balances and/or finding ways to boost your income.

You’ll also need to: 

• Have enough home equity to meet the lender’s minimum, anywhere between 3% – 20%
• Be current on your current mortgage with no missed payments
• Have the cash to cover closing costs

Compare Lenders and Offers

One size does not fit all, whether we’re talking about lenders or specific home loan types. There are online tools and calculators that will help you do the comparison homework, however. 

Don’t default to relying on offers from your current lender. Instead, compare multiple lenders—including at least one of each of the three categories below—before selecting where to apply. You can refinance your mortgage through a bank, credit union, or online lender.

In addition to offering different interest rates, lenders may have different: 

• Credit score, DTI, and income or asset requirements
• LTV limits
• Closing costs and loan fees

You’ll particularly want to shop around if you have a poor credit history or difficult financial circumstances. 

In most cases, you can get the best offers from credit unions and other equal housing lenders since they’re nonprofit entities with a mission to serve members’ needs rather than those of shareholders. 

Benefits of Refinancing a Fixed-Rate Mortgage

Done right, a refi has the potential to save you piles of cash or even save your house from foreclosure. Depending on how you structure it, a mortgage refinance can help you achieve one or more of the following: 

• Lower your interest rate with a better application, lender, or offer
• Reduce the total interest paid 
• Eliminate private mortgage insurance (PMI)
• Lower your monthly payments so you can invest more or avoid default
• Pay off debt faster with a shorter loan term 
• Convert equity with a cash-back refinance loan

Potential Drawbacks and Considerations

On the flip side, it’s not all moonlight and roses. Without careful planning, refinancing can create negative results such as: 

• Higher rate – End up with an interest rate above your current loan rate.
• Closing costs – Pay upfront closing costs of 2% – 6% of the loan amount.⁸
• Fees – Owe prepayment penalties if you switch to another lender or loan.
• Lost wealth – A higher rate and/or longer term can mean thousands of dollars more in total interest—do the math before you commit to a refinance.

Refinancing Alternatives 

Depending on your needs and motives, there are multiple alternatives to a refinance loan. You can: 

• Recast your current loan with a lump-sum payment to reduce your loan term 
• Ask for loan mitigation to lower your monthly payment amount due to financial hardship
• Sell your home and downsize to an apartment or smaller house

Even still, you may be interested in avoiding additional debt altogether by paying back your fixed rate mortgage. If you’ve been wondering “how to pay off my mortgage faster,” it may be worthwhile to explore alternatives to refinancing that don’t involve accruing more debt. 

Sale-Leaseback

There is also a debt-free alternative to refinancing: a residential sale-leaseback. Instead of worrying about how interest rates will affect your payments, with this arrangement, you can sell your home outright. The new homeowner then becomes your landlord. You remain in your home as a renter, without the added stress of home ownership. 

Once you unlock the equity in your home, your mortgage will be paid in full and the profit left over will be available to use as you see fit. Plus, as a new tenant, you’ll no longer have to worry about the cost of major repairs, property insurance, or property tax!

Making the Right Decision

Navigating the world of home loans and refinance rates can be overwhelming, but with the right tools, you can make the decision that is best for your unique situation. While you can refinance your fixed-rate mortgage, it takes some footwork to figure out if that’s the right move for you. Ideally, a refinance should provide benefits such as paying less total interest over time or lower monthly payments. However, current interest rates and upfront costs mean more homeowners are considering a sale-leaseback to pay off their mortgage and wipe out their monthly payments. 

With Truehold's sale-leaseback option, you can close on a sale quickly and convert your equity to cash without the need to move out of your beloved home. A Truehold sale-leaseback guarantees you the first right of residency to your home. That means you can continue living at home as a renter for as long as you’d like, providing you comply with the lease, and move when the time is right. During that time, we handle the cost of major repairs, property insurance, and property tax. 

Ready to learn more? Call us today and a Truehold Advisor will connect with you to review the process and see if a sale-leaseback is a good fit for your financial picture and goals. 

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Sources: 

1. Bankrate. Compare current mortgage rates for today. https://www.bankrate.com/mortgages/mortgage-rates/‍
2. FRED. Bank Prime Loan Rate Changes: Historical Dates of Changes and Rates. https://fred.stlouisfed.org/series/PRIME‍
3. Bankrate. Prime rate, federal funds rate, COFI. https://www.bankrate.com/rates/interest-rates/prime-rate/‍
4. Forbes Advisor. Mortgage Rates Forecast For 2024: Experts Predict How Much Rates Will Drop. https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/‍
5. Morningstar. When Will the Fed Start Cutting Interest Rates? https://www.morningstar.com/markets/when-will-fed-start-cutting-interest-rates‍
6. Financial Forecast Center. WSJ Prime Rate Forecast. https://www.forecasts.org/prime.htm‍
7. The Mortgage Reports. Refinance Requirements: What You Need to Refinance Your Home in 2024. https://themortgagereports.com/76288/basic-refinance-requirements‍
8. CNN Underscored. How much does it cost to refinance a mortgage? https://www.cnn.com/cnn-underscored/money/how-much-does-it-cost-to-refinance-a-mortgage

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