Can You Lower Your Mortgage Rate Without Refinancing?
Mortgage rates are looking more attractive this year — and that means that mortgage refinancing activity is likely to heat up. At the end of May, the average 30-year fixed-rate mortgage was 3.99%, according to Freddie Mac’s Primary Mortgage Market Survey. A year ago, the average rate was 4.56%.
Still, not everyone is in a position — or even desires — to refinance their mortgage. Depending on your situation, it may not make sense to go through the process and paperwork of replacing your current mortgage with a brand-new loan.
Unfortunately, if you are looking to lower your mortgage rate without refinancing, your options are limited. It’s possible if you’re facing financial turmoil, but in most cases, you’ll need to either take another route to save money on your mortgage or prepare yourself to qualify for a refinance.
In this article, we will cover:
- Why mortgage rates matter
- Can you lower your rate without refinancing?
- Alternative ways to save on your mortgage
- Why mortgage borrowers refinance
Why mortgage rates matter
The interest rate on your mortgage is what you pay for borrowing a mortgage to buy a home. It’s represented as a percentage of the loan amount.
Mortgage rates have a major influence on a home loan’s affordability. For example, if you’re quoted a 4% interest rate for a 30-year mortgage on a $200,000 home, and you’re making a 20% down payment ($40,000), the principal and interest portion of your monthly mortgage payment would be approximately $764.
If you take that same loan but increase the interest rate to 4.5%, your estimated principal and interest mortgage payment would jump to $811 — a monthly difference of nearly $50, and more than $16,000 difference in interest over the life of the loan.
How your interest rate is determined
Mortgage interest rates heavily depend on overall economic conditions and fluctuate every day.
But the specific rate you receive will likely be different. Several factors help determine the mortgage rate you’re offered, including:
- Your credit score. The higher your score, the lower your rate will be.
- Your down payment amount. The more you put down, the lower your rate tends to be.
- Your mortgage amount. Larger loans often qualify for lower interest rates.
- Your mortgage term. Shorter-term loans, like a 15-year mortgage, tend to have lower rates.
- The number of discount points you pay. Discount points are essentially an upfront fee you pay to lower your interest rate.
- The location of your home. The mortgage market can be highly localized, and rates in one town may be different from those in another.
- The type of loan you borrow. Conventional loans will have different rates than FHA or VA loans, for example.
- The type of interest rate you pick. Fixed-rate loans tend to have higher rates than variable rate loans — but you get the security of a rate that never changes.
Can you lower your rate without refinancing?
Because your interest rate makes such a big difference, it’s vital to have the lowest rate possible on your mortgage. The easiest way to trade a higher rate for a lower one is through refinancing.
However, not every mortgage borrower can or wants to refinance their loan. Perhaps they haven’t built up enough equity in their home. Or maybe they want to avoid the upfront costs associated with refinancing, which could range from 3-6% of the loan amount.
So, can you lower your mortgage rate without going through the refinancing process? In most cases, the answer is no.
The one exception? If you’re having trouble paying your mortgage and you can convince your lender to work with you.
“The only way I know of lowering your interest rate without refinancing is via a loan modification,” Michael Becker, a branch manager at Sierra Pacific Mortgage in Lutherville, Md., told LendingTree.
A loan modification allows you to change the original terms of your mortgage, either by extending your loan term, reducing your principal balance or lowering your mortgage rate. You typically must be experiencing a financial hardship in order to qualify for a modification — such as being delinquent on your mortgage payments. Lenders will ask you to document that hardship and to show that it will be temporary.
This route carries significant risks, and should only be pursued in dire situations.
“I think lenders may still allow a borrower to modify a loan, but I think they will likely have to prove financial stress and even go late on their mortgage, thereby wrecking their credit,” Becker said.
Alternative ways to save on your mortgage
If you’re still in good financial shape, you’re not out of options. If a refinance doesn’t fit into your short-term financial goals, there are other methods you can use to save money on your mortgage. Below, we highlight a few options.
Recasting your mortgage
A mortgage recast is a transaction that lowers your monthly mortgage payments. You provide your lender with a lump sum of cash that is applied to your outstanding loan principal balance. The lender then recalculates your monthly payments based on the reduced loan balance, but your loan term and interest rate don’t change.
Keep in mind there is usually a minimum lump sum amount of $5,000 to $10,000, and you might be charged a recasting fee. Check with your lender for specific requirements.
Dropping mortgage insurance
If you’re a conventional loan borrower who put down less than 20% on your mortgage, chances are you have cancelable private mortgage insurance. This means that after reaching a 20% equity in your home, you can request that your lender remove PMI from your loan — reducing your monthly mortgage payments.
Things are a bit more complicated if you have an FHA loan. FHA mortgage insurance premiums are harder to drop. To get rid of FHA mortgage insurance, you would’ve had to put down at least 10% at closing and wait 11 years. Otherwise, the only way to drop the insurance is by refinancing into a conventional mortgage.
Making biweekly payments
It’s more of a long game, but splitting your mortgage payments in half and making those half payments every two weeks can save you money and eventually shorten your loan term.
Over the course of a year, you would make 26 biweekly payments, which works out to 13 full payments. If you start biweekly payments when you first borrow your mortgage and continue them throughout your loan term, you end up shaving more than four years off your repayment period.
Why mortgage borrowers refinance
Since it’s next to impossible to lower your interest rate without refinancing, you might be reconsidering at this point.
A mortgage refinance can serve a variety of needs, and not all borrowers refinance for the same purpose. Here are some common reasons to refi a home loan and scenarios when they might make sense for you:
|Common Reasons for Refinancing a Home Mortgage|
|Reason to refinance||Why?|
|Lower your mortgage rate||Mortgage rates have significantly improved since you first borrowed your existing mortgage. If your credit scores and/or income have increased, you may qualify for a better rate.|
|Consolidate your debt||You’re carrying credit card debt with high interest rates and would like to get rid of that debt sooner by using a cash-out refinance, and applying the funds you receive toward your outstanding card balances.|
|Remodel your home||You’ve owned your home for several years, built up a significant amount of equity and want to use a cash-out refi to pay for home improvements that boost your home’s value.|
|Change your loan term||This would be an option whether you want to extend your loan term to shrink your monthly mortgage payments, or shorten the term to accelerate your loan payoff and potentially get a lower mortgage rate.|
|Change your rate type||You have an adjustable-rate mortgage and your monthly payments have increased significantly because of your variable rate. You could refinance to a fixed-rate mortgage for more stability.|
The bottom line
The most straightforward way to snag a lower interest rate after you already have a mortgage would be to refinance, but there are other ways to reduce your loan costs like making extra loan payments whenever you can and dedicating financial windfalls to your outstanding balance.
If you haven’t yet purchased a home, be sure to shop around before selecting your mortgage lender. Comparison-shopping for the best mortgage rate could potentially save you thousands of dollars on your loan.