Cash-Out Refinance

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While there is no minimum requirement, most lenders prefer a credit score of 620 or above.

A VA home loan is a mortgage backed by the Department of Veterans Affairs (VA) for service members, veterans, and their families. The purpose of VA loans is to help veterans purchase homes with lower interest rates and better terms. While VA loans are typically easier to get approval for than conventional loans, private lenders still have certain requirements you must meet. One of these requirements is typically a good credit score. 

However, the demands and sacrifices of military service can make maintaining a strong credit score a challenge. Read on to learn how to get a VA loan with bad credit. 

Table of Contents: 

What Is the Minimum Credit Score for a VA Loan?

The VA doesn’t set a minimum credit score requirement because the organization doesn’t provide home loans. However, the lenders that issue the loans will often have credit standards prospective borrowers must meet. VA lenders generally look for a minimum credit score of 620. For comparison, conventional lenders also typically require a 620 credit score. 

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This requirement is flexible, and some VA lenders may approve borrowers with scores as low as 580. 

Compensating Factors Your Lender May Take Into Account

Since there isn’t a minimum credit score requirement, other factors may help you secure a loan—even if your credit score is less than stellar. Known as compensating factors, these are financial strengths that counteract weaknesses in your application. According to the VA, compensating factors include the following: 

  • Limited use of consumer credit
  • Little consumer debt
  • Stable employment history
  • Substantial liquid assets
  • Significant down payment
  • The existence of equity in refinancing loans
  • Minimal or zero rise in housing costs
  • Military benefits
  • Positive prior homeownership track record
  • Ample residual income
  • Low debt-to-income ratio
  • Tax breaks for child care
  • Tax advantages of homeownership

Other VA Loan Requirements 

In addition to your credit score, lenders typically have other financial requirements that help them determine if a borrower can qualify for a loan. Here’s an overview: 

  • Debt-to-income ratio: VA loan borrowers should aim to keep their debt-to-income (DTI) ratio under 41% for the best chances of approval. Use an online calculator to help determine your DTI. 
  • Residual income: The VA has requirements for residual income, or income left over after paying all your major expenses. The requirements vary depending on the loan amount and your geographic location. 

These requirements are set by lenders, not the VA, so they may be flexible. 

How to Get a VA Loan After Bankruptcy or Foreclosure 

You can still qualify for a VA loan even after filing for bankruptcy or foreclosure, though you may be subject to a waiting period before you’re eligible. Here’s an overview of how to get a loan after foreclosure or bankruptcy. 

  • Chapter 7 bankruptcy: A Chapter 7 bankruptcy, known as “liquidation bankruptcy,” involves selling assets to pay off debts. The waiting period for a Chapter 7 bankruptcy is two years from debt discharge to qualify for a VA loan. In addition to satisfying the waiting period, you can’t have had any late payments or new accounts since filing bankruptcy. 
  • Chapter 13 bankruptcy: Known as a “reorganization bankruptcy,” a Chapter 13 bankruptcy involves creating a plan to repay the debt. The waiting period for a Chapter 13 bankruptcy is 12 months after filing. 
  • Foreclosure: A foreclosure is a process that occurs when a lender seizes a property after the borrower fails to make mortgage payments. The waiting period for a foreclosure is two years.

Who Qualifies for a VA Loan?

To qualify for a VA loan, you must meet the eligibility requirements from the Department of Veterans Affairs (VA). Below are the minimum active-duty requirements:

  • Service members: Eligible if you served for at least 90 continuous days 
  • Veterans: Eligible if you served for at least 181 continuous days, although this may differ depending on when you served
  • Reserve: Eligibility depends on when you served 
  • National Guard: Eligibility depends on when you served 
  • Surviving spouses: Eligible if you’re the surviving spouse of a Veteran including Veterans who are missing in action or being held as a prisoner of war (POW)

Note that those who have been dishonorably discharged are not eligible for VA loans. Check out the VA’s eligibility requirements for more information or to see if you qualify. If you meet the requirements, you can request a Certificate of Eligibility (COE) from the VA. 

What Are the Benefits of a VA Loan? 

VA loans provide many benefits you would not get with other loan types. These advantages include: 

  • No down payment required
  • Competitive interest rates
  • Private Mortgage Insurance (PMI) not required
  • Lower closing costs 

Types of VA Loans

There are different VA loan types to consider depending on your needs. Here’s an overview of each option to help you decide which loan type is right. 

VA Purchase Loan

You can use a VA purchase loan to improve, buy, or build a home. While no down payment is required, putting money up front might help your chances of approval if you have low credit. Keep in mind that poor credit will likely result in a higher interest rate. 

VA Native American Direct Loan (NADL) program

The Native American Direct Loan (NADL) is available to Native American veterans or non-Native American veterans who have a Native American spouse. You can use these loans to improve, buy, or build a home on federal trust land. 

VA Interest Rate Reduction Refinance Loan (IRRRL)

An interest rate reduction refinance loan (IRRRL) allows you to refinance your existing loan to get a lower interest rate and, therefore, reduce your monthly payments. This is a good option for borrowers with low credit scores since it doesn’t require a credit check. Instead, lenders will look at the payment history for your existing loan to determine approval. 

VA Cash-Out Refinance Loan

A VA cash-out refinance loan allows you to tap into your home’s equity to receive cash. Most lenders require a 620 score or above to qualify. You may need to pay a VA funding fee on a refinance. 

Improve Your Credit to Qualify for a VA Loan

Even with a credit score under 620, eligible veterans can still get a VA loan. With a little time and dedication, you can improve your credit and put your VA benefits to use. Below are a few steps you can take to begin raising your credit: 

  • Pay your bills on time: Payment history is a  key factor that contributes to your credit health. Consistently paying your bills on time will help raise your score. 
  • Make frequent payments: The amount of credit you’re using, also known as your credit utilization, impacts your credit score. Making several payments within the month can help you keep a lid on your credit utilization.
  • Request a credit limit increase: Another way to lower your credit utilization ratio is by asking your credit card company for a credit limit increase. This only helps your credit if you keep the amount you’re spending the same. 
  • Keep old accounts open: Length of credit history is another important factor in determining your credit score, so avoid closing old accounts.
  • Dispute errors on your credit report: Get a copy of your credit report and check for inaccurate information. Common errors include incorrect account statuses, inaccurate balances, and identity errors. If you find an error, file a dispute with the relevant credit bureau. 

By checking your credit score, you can gauge your chances of getting approved for a VA loan. Get your free credit score today to see where you stand.

Source: credit.com

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Speaking with your current lender about refinancing options is a great first step if you currently have low credit.

Key Takeaways: 

  • Refi programs exist to specifically help low-credit applicants.
  • A cosigner with a high credit score can help you successfully apply for refinancing.
  • Mortgages with APR may be more costly in the long run.

When you refinance your mortgage, you’re basically replacing that mortgage with a different loan. Your lender will then use that new mortgage to pay off the old one first, so you’ll only have one monthly payment.

A refinance can have different interest rates and terms. A lower interest rate can result in less expensive monthly payments and reduce the overall cost of your loan. Conversely, shorter terms can help you pay down a new loan much faster via larger monthly payments.

It’s certainly possible to refinance with bad credit once you know your options. We’ll discuss several popular options and explain how Credit.com can help you find strong mortgage rates based on your current circumstances.

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Can You Refinance With Bad Credit?

Your credit score plays a major role when you apply for a loan, but refinancing and  is certainly possible. In fact, Federal Housing Administration (FHA) loans can help you secure financing with a credit score between 500 and 579 if you provide a 10% down payment.

Five Options for Refinancing With Bad Credit

It’s possible to secure new funding with low credit. Below are five of the most popular options for low-credit refinancing. 

1. Talk to Your Current Lender

If you’re in good standing with your current mortgage lender, talk to them about refinance options. Being in good standing means you’ve regularly made on-time mortgage payments and haven’t had any issues with your lender.

Lenders make money on your mortgage. If you want to refinance to extend your mortgage payments—to reduce your monthly payments, for example—the lender could make more money off your loan in the future. Your current lender may want to keep your business and could be more likely to work with you.

2. Use a Cosigner

A cosigner is someone willing to help you take on the responsibility of making regular mortgage payments. Cosigners with good credit can help you secure funding you normally wouldn’t be eligible for.  

Cosigners can be spouses, relatives, close friends, or business partners. If you’re attempting this approach, make sure you have a strong financial plan to show your cosigner that you’ll make timely payments. With a cosigner, your credit history  is linked, so missing a payment can hurt both your credit scores.

3. Use an FHA Streamline, Simple, or Cash-Out Refinance Loan

FHA-backed mortgages are known to have less strict credit requirements, and the same applies to refinances. If you have bad credit and late payments on your credit report, you might consider FHA programs—especially if you already have an FHA loan.

Streamline FHA Refinance

Streamline FHA refinance programs are for those with an FHA mortgage who want to refinance with an FHA loan. Your mortgage must be current, and you can’t get more than $500 cash out of this refinance. Appraisals aren’t a requirement for these loans.

There are two types of streamline loans:

  • Credit qualifying: You provide the income and credit documentation you normally would when getting a mortgage. If you’re taking one of the borrowers off the mortgage during the refi, you must use this option.
  • Noncredit qualifying: At least some credit review—and a review of past performance on your existing mortgage—is required. But it may not be as comprehensive as a credit-qualifying loan.

Simple Refinance

Simple refinance is another option that doesn’t allow cash out. This program is only relevant for refinances on primary residences or secondary residences with HUD approval. You also have to be up-to-date on mortgage payments.

Cash-Out Refinance

FHA cash-out refinance programs let you get some cash back during refinance if you have equity in your home. You’re limited to 85% to 95% of equity, depending on the status of your current mortgage.

To qualify, you must have had the property for at least 12 months and made the last 12 mortgage payments in the month they were due. Other credit and financial factors may also apply.

4. Apply for a VA Refi Program

The VA provides several refinance options for those who are eligible because they’re qualifying veterans, active-duty service members or eligible family members. As with FHA refinance options, you can find programs that support straight or cash-out refinance.

Interest Rate Reduction Refinance Loan

This is a refinance option that gets veterans a lower interest rate on their mortgage. Here’s who’s eligible:

  • Veterans
  • Active-duty service members
  • Members of the National Guard or Reserves called to active duty
  • Some surviving spouses
  • Current Reserve and National Guard members (after six years of qualifying service)

Cash-Out Refinance

This VA refinance has the same eligibility requirements as the Interest Rate Reduction Refinance Loan. The loans typically come at market rates and include a VA funding fee.

5. Consider the USDA Streamlined Assist Refinance Program

The United States Department of Agriculture (USDA) offers a few refinance programs but notes that the Streamlined Assist refi is the most popular. It doesn’t require an appraisal unless a subsidy is involved. A full credit review is not required. However, the loan must have been paid on time for the previous 12 months and is only available for certain types of homes.

Improve Your Credit Before You Refinance

If you can’t find a refinance that works with your credit score—or you don’t find one that works for you—you might want to improve your credit before applying for a refi. Start by accessing 28 of your FICO® scores via ExtraCredit® to see where you stand.

You can improve your credit by:

  • Making on-time payments. Payment history accounts for a large part of your credit score.
  • Paying down revolving credit, such as credit cards. Credit utilization is another big part of your score.
  • Dispute credit errors on your report with the credit bureaus to repair your score.

Find the Right Mortgage for You

No matter where you’re at, finding a mortgage is an exciting—and overwhelming—process. Whether you’re ready to start looking for a refinance now or want to wait until you’ve improved your credit, Credit.com can help you with your goals. 

We offer tools that help you find competitive mortgage rates and provide a mortgage calculator for anticipating your financial needs.

Source: credit.com

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In this issue

  • While the economy continues to expand and added 2.7 million jobs in 2023, signs point to a normalization in the labor market as job growth is expected to moderate in 2024. MORE
  • While mortgage rates have moved sideways since mid-December, housing continues to be impacted by higher mortgage rates with total home sales on track to be the lowest since 2012. MORE
  • Facing higher borrowing costs, borrowers are paying more discount points to buy down their mortgage rate, but they may not be getting the benefit. MORE

Recent developments

U.S. economy: According to the latest estimate of U.S. economic growth for Q3 2023, the economy grew at a seasonally adjusted annualized rate (SAAR) of 4.9%, slightly slower than the second estimate but still the fastest since Q4 2021— and among the fastest growth in the last 20 years. Consumption spending growth was revised down from a SAAR of 3.6% in the second estimate to 3.1% in the final estimate. This was mainly led by a decline in spending on services but remained the largest contributor to growth at 2.1 percentage points. After nine consecutive quarters of negative growth, residential investment growth came in much stronger than the initial estimates at a SAAR of 6.7%.

The labor market remained much stronger than expected in 2023 and defied expectations of a slowdown. The economy added 216,000 jobs in December, bringing the total jobs added in 2023 to 2.7 million.1 While total jobs added in 2023 was lower than the historical highs of 2021 and 2022, job growth was still remarkable given the high interest rate environment the economy faced. The unemployment rate remained unchanged in December at 3.7% compared to November 2023, but moved up 0.3 percentage points over the year.

While job growth remained significant over the year, some indications of a softer labor market are starting to creep in. The labor force participation rate as well as employment to population ratio decreased 0.3 percentage points over the month to 62.5% and 60.1% respectively. Downward revisions to October and November job growth meant the 3-month average job gain in the fourth quarter of 2023 was the lowest since the third quarter of 2019, if we exclude the 2020 recession. However, the torrid pace of job growth was unlikely to be sustained and employment growth is approaching levels consistent with a balanced labor market. Heading into 2024, we might see a moderation in job growth, which would be more consistent with long-run growth in the U.S. labor force. Job openings edged down slightly to 8.8 million in November 2023, according to the Bureau of Labor Statistics (BLS) Job Openings and Labor Turnover Survey. The ratio of job openings to unemployed, a metric that the Federal Reserve has been tracking to gauge the strength of the labor market, declined from a high of around 1.8 in January 2023 to 1.4 in November.

Inflation continues to trend towards the Federal Reserve’s target rate of 2%. The preferred measure of inflation of the Federal Reserve, the Core Personal Consumption Expenditure (PCE) measure increased at a rate of 3.2% year over year, the smallest annual increase since May 2021.2 While inflation has been moderating as the labor market normalizes, a reacceleration of home prices along with still high average hourly earnings growth at 4.1% year over year, could mean that getting to the 2% target might take longer than expected.

U.S. housing market: The housing market felt the impact of higher rates in 2023 with total annual home sales on track to be the lowest since 2012. Total (existing and new) home sales reached 4.4 million units in November 2023, down 1.2% as compared to October 2023 and 6.2% below November 2022. Total home sales averaged around 4.8 million from January through November 2023. Existing home sales were at 3.8 million as of November 2023 and averaged 4.1 million through November 2023.3 The existing housing inventory grew 15.3% year to date in November but the level of inventory (1.1 million homes available for sale in November) remains extremely low by historical standards.4 The rate-lock effect, which was the main driver of the lack of existing inventory, continued to push buyers towards the new home market. The number of new homes available for sale increased 2.7% year-to-date and was up 2.5% from the previous month. Overall, the sales of new homes averaged 666,000 in 2023 as compared to 637,000 in 2022.5

Falling interest rates have spurred the confidence of both potential homebuyers as well as the homebuilders. The Housing Market Index, which had decreased since August increased in December 2023. While existing home sales increased in November, pending home sales for November were still weak and saw a 5.2% decrease from the previous year. The FHFA Purchase-Only Home Price Index indicated that as of October of 2023, home prices rose 6.1% year to date, and as more home buyers enter the market amidst the lack of inventory, the pressure on prices could increase further.

U.S. mortgage market: Mortgage rates were on an upward trajectory for most of 2023, reaching 23-year highs in October. However, since the last week of October, rates have been declining mainly on the expectation of rate cuts by the Federal Reserve along with easing inflationary pressures. The average 30-year fixed-rate mortgage, as measured by Freddie Mac’s Primary Mortgage Market Survey® (PMMS®), fell almost one percentage point from the last week in October through mid-December. Despite the decline in recent weeks, mortgage rates are 13 basis points higher than they were at the beginning of the year. Mortgage activity also declined with purchase applications down almost 12% in 2023 and total applications down 7% even as refinance applications increased 15% over the year.6

Tighter financial conditions and higher overall interest rates are starting to impact mortgage delinquency rates. Total mortgage delinquency rates were up 0.25 percentage points from 3.37% in Q2 2023 to 3.62% in Q3 2023 according to the MBA’s National Delinquency Survey. The delinquency rate on conventional mortgages increased from 2.29% to 2.5% in Q3 2023 while the delinquency rate of VA loans was up from 3.7% to 3.76% over the same period. The largest increase was in the delinquency rate of FHA loans which increased 0.55 percentage points from 8.95% in Q2 to 9.5% in Q3. Interestingly, serious delinquency rates (90+ DQs) went down across the board between Q2 and Q3. Foreclosure starts increased from 0.13% in Q2 to 0.19% in Q3 2023 but remain low compared to its historical average.

Outlook

The U.S. economy exhibited tremendous resilience last year on strong consumer spending. We expect economic growth to slow this year as consumer spending starts to fade. Under our baseline scenario, with a slowing economy, the unemployment rate will see a modest uptick, and inflation will continue to moderate.

With inflation remaining above the Federal Reserve’s target rate of 2%, we do not expect the Federal Reserve to start cutting the federal fund rates immediately. However, it will continue to pause on interest rate hikes. We expect rate cuts in the second half of the year if the job market cools off enough to keep inflation muted. Under this scenario, we expect mortgage rates to ease throughout the year while remaining in the 6% range.

Falling rates will breathe some life into the housing market with some recovery in home sales. However, home sales are expected to grow only modestly due to a lack of inventory in the market. The demand for housing, however, will remain high based on a large share of Millennial first-time homebuyers looking to buy homes, which will push home prices up. We forecast home prices to increase 2.8% in 2024 and 2.0% in 2025 nationally.

Under our baseline scenario, we expect increases in both purchase and refinance volumes this year and into 2025. On purchase originations, higher home sales and growth in home prices will drive the dollar volumes of purchase originations up. However, we do not expect purchase origination volumes to reach the levels seen in 2021 and 2022 as lack of inventory will limit home sales. The drop in mortgage rates will push refinance originations up, as buyers who obtained higher interest rates in 2023 will likely refinance into lower rates. However, rates remaining around the 6% range will not provide enough refinance incentives to millions of homeowners who currently have rates below 6%. And therefore, we expect refinance volume to grow only modestly this year. Overall, we forecast total origination volumes to improve this year and into the next.

January 2024 SPOTLIGHT:

Declining affordability led borrowers to pay more discount points to buy down rates, but our research suggests it may not be worth it

Mortgage rates, as measured by Freddie Mac’s PMMS®, increased significantly in 2023 compared to the record lows of the past few years. On October 26, 2023, the average 30-year fixed-rate mortgage stood at 7.79%, a 23-year high. Since then, mortgage rates have moderated, but remain high by recent historical standards. These higher mortgage rates led many borrowers to make the decision to pay points in order to lower the rate when purchasing a house or refinancing an existing mortgage. During the low interest rate environment, few borrowers opted to pay discount points when obtaining a mortgage, but as rates started creeping up in the early 2022, we saw more borrowers paying discount points to lower their rate.

Using Freddie Mac closing data, we examined how often borrowers pay discount points and how many points they pay. For this analysis, the points we are focusing on are for permanent interest rate reductions throughout the life of the loan.7 To that end, we looked at a borrower profile that roughly matches our PMMS® population: mortgage for a home purchase or refinance of a one-unit, single-family owner-occupied property with a fully amortizing 30-year fixed-rate mortgage. We further restricted our sample to borrowers with conforming loans, and with credit scores 740 or above and a loan-to-value (LTV) ratio between 75 and 80 (inclusive).

We found that the share of borrowers who paid discount points increased in 2023 (Exhibit 1). For example, about 58.8% of purchase mortgage borrowers paid discount points in 2023, compared to 31.3% and 53.6% of purchase borrowers in 2021 and 2022 respectively. The share paying discount points was higher for noncash- out and cash-out refinance borrowers, 59.9% and 82.4%, respectively. Also, conditional on paying points, refinance borrowers tended to pay much higher points: 0.99 points for purchase borrowers compared to 1.16 and 1.76 points for non-cash-out and cash-out refinance borrowers, respectively.

It is interesting to note, however, that the interest rate differential between borrowers who pay discount points and those who do not pay discount points is very small. Through November 2023, the average effective rate on purchase loans for borrowers who did not pay discount points was 6.69% versus 6.86% for those who did pay points. This result seems to suggest that paying discount points may not be worth it from the consumers’ point of view. Indeed, some academic research8 has shown that in many circumstances paying discount points can be a poor financial decision. However, while our tabulation shows that borrowers who do not pay points generally receive lower mortgage rates compared to similar borrowers who do pay points, we do not control completely for borrower observed and unobserved attributes. Therefore, we cannot say with certainty that for any particular borrower, the relationship between discount points paid and interest rate is negative.9

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Exhibit 2 compares the quarterly average discount points paid by Freddie Mac borrowers (home purchase, owner occupied, one-unit properties). From 2018 through 2021, borrowers that matched the PMMS® profile, (borrowers with origination LTV between 75 and 80 and FICO score 740 or higher) paid about the same average amount of points compared to all purchase borrowers. Starting in 2022 and continuing through 2023, higher credit quality borrowers tended to pay fewer points compared to all borrowers. In 2023, borrowers that matched the PMMS® profile paid on average about 0.06 less points or about 10% less compared to all purchase borrowers.

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Prime borrowers who pay discount points on average have higher incomes and are obtaining higher loan balances when purchasing a home compared to borrowers who do not pay points. For example, in 2023 the average loan amount for purchase loans with points paid at origination was $360,000, compared with an average loan amount of $370,000 for mortgages where the borrowers did not pay points. In 2023, the average annual income of a “no discount points” borrower was $148,000, higher than the $140,000 average annual income for borrowers who paid points.

Our analysis on the closing files data shows that there is a difference in borrower behavior across the U.S. when it comes to paying discount points and origination fees. For example, in 2023 over 70% of prime purchase borrowers in HI, NM, WV, OR, WA, and DE paid discount points when closing on their mortgage while less than 50% of borrowers paid discount points in VT, IA, MA, IL, NE, ND, and WI. Exhibit 3 below shows the breakdown by state in 2023.

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Our analysis shows that mortgage borrowers in 2023 were more willing to pay discount points than in previous years, and that the likelihood of paying points was greater for lower credit quality borrowers compared to the high-quality mortgage borrowers captured in our PMMS® profile population. We also saw that borrowers in the Midwest were less likely to pay points compared to borrowers in the Pacific and Mountain West. If interest rates stabilize in 2024, it will be interesting to observe whether borrowers opt to pay fewer points, or if the recent uptick in paying discount points is a more permanent shift in the mortgage market.

  • Footnotes

    1 Non-Farm Employment, Bureau of Labor Statistics

    2 BEA

    3 National Association of Realtors (NAR)

    4 From January 1999 through December 2019 the average number of existing homes available for sale averaged 2.2 million, about double the number of homes available for sale in November 2023.

    5 U.S. Census Bureau and U.S. Department of Housing and Urban Development

    6 Mortgage Bankers Association (MBA)

    7 For an analysis of temporary buydowns see our previous Research Brief: https://www.freddiemac.com/research/insight/20230731-temporary-mortgage-rate-buydown-activity-spiked-in.

    8 See for example: Agarwal, S., Ben-David, I. and Yao, V., 2017. Systematic mistakes in the mortgage market and lack of financial sophistication. Journal of Financial Economics, 123(1), pp. 42-58.

    9 For a more detailed analysis see: Mota, N., Palim, M. and Woodward, S., 2022. Mortgages are still confusing… and it matters—How borrower attributes and mortgage shopping behavior impact costs. Fannie Mae Working Paper. https://www.fanniemae.com/media/45841/display

Prepared by the Economic & Housing Research group

Sam Khater, Chief Economist  
Len Kiefer, Deputy Chief Economist  
Ajita Atreya, Macro & Housing Economics Manager  
Rama Yanamandra, Macro & Housing Economics Manager  
Penka Trentcheva, Macro & Housing Economics Senior  
Genaro Villa, Macro & Housing Economics Senior 
Lalith Manukonda, Finance Analyst

www.freddiemac.com/research

Source: freddiemac.com

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Pennymac proudly supports our nation’s heroes by offering Department of Veterans Affairs (VA) loans. We service over 445,000 VA loans on behalf of service members, veterans and their families – over 43,000 of which originated in the first 9 months of 2023.*

If you’re connected with the United States military, you may be eligible for VA loans, such as no down payment purchase loans and low-interest refinance loans. In this guide, we’ll look at what a VA loan is, the qualification criteria, the benefits and how to find the one that could be right for you.

*As of 9/30/2023

What Is a VA Loan?

A VA loan is a mortgage loan guaranteed by the United States Department of Veterans Affairs. It’s available to eligible veterans, service members and surviving spouses and offers numerous benefits, including:

  • No down payment on home purchase loans
  • Competitive interest rates
  • More flexible credit requirements than conventional non-VA loans
  • Lifetime benefit — you can use your VA loan entitlement multiple times

VA loans are specifically designed to meet the needs of veterans and their families, opening up increased opportunities for homeownership and building equity.

How Does a VA Loan Work?

VA loans are government-backed loans that offer veterans and service members more flexible borrower criteria than conventional loans. The VA guarantees the loans, reducing the risk for lenders and enabling lower credit scores and down payment requirements.

Not Just For First-Time Homebuyers

While you can use a VA loan for your first home, you can take advantage of the VA loan benefit again if you sell or refinance.

Navigating the VA Purchase Loan Process Step by Step

VA loans and the process to obtain them are similar to other types of Pennymac mortgage loans, with some key differences. Here’s a breakdown of the steps involved in applying for and securing a VA home purchase loan.

1. Start your application online or talk to a Pennymac Loan Expert. One of the unique aspects of a VA loan is that we’ll use your Certificate of Eligibility (COE) to confirm that you meet the basic VA loan requirements, but you don’t need it to begin your application.

You can visit the eBenefits section of the U.S. Department of Veterans Affairs website to request your COE online or obtain VA Form 26-1880 to make your request through the mail. If you prefer, your Loan Expert will be happy to guide you through the steps involved to verify your eligibility and obtain your COE.

2. Receive a Pennymac BuyerReady Certification. The BuyerReady Certification is Pennymac’s unique loan certification process that confirms how much of a mortgage you will likely qualify for based on submitted financial documents. While it doesn’t guarantee a loan, BuyerReady Certification can help you house-shop with confidence so you’ll know which homes will fit your budget.

BuyerReady Certified homebuyers also qualify for Pennymac’s Lock & Shop program,* which allows you to lock in a rate before locating a property. Protect yourself from future rate increases and potentially save thousands of dollars in the lifetime cost of your mortgage.

3. Look for homes. Meet with a real estate agent and begin looking for homes. Once you’ve found a home you’d like to purchase, you can continue with the VA loan process. Pennymac Home Connect can assist in finding a reputable real estate agent in your area.

4. Complete underwriting and loan process. Since you’ve already submitted most of the documentation and information you’ll need for the mortgage through the BuyerReady Certification process, loan processing is typically smoother and faster.

5. Close and get the keys! Once your loan is approved, you’ll have your closing, where all necessary paperwork will be signed.

At this time, you’ll get the final details of your loan terms and required closing costs, which are the extra fees buyers and sellers pay to close on a real estate transaction beyond the home’s purchase price. One of the fees unique to the VA loan is the funding fee, which can be paid in full at closing or rolled into the total loan amount.

About the VA Loan Funding Fee

The funding fee is a one-time charge, typically between 1.25% and 3.3% of the loan amount. The fee goes to the U.S. Department of Veterans Affairs to support the VA loan guaranty program, which helps keep VA mortgages low-cost and available for future veterans to achieve homeownership.

Funding Fee Exemptions

The following individuals are exempt from paying the VA funding fee:

  • Purple Heart recipients
  • Veterans eligible for compensation for service-connected disabilities or who would be eligible if they didn’t receive retirement pay
  • Veterans eligible for compensation based on a pre-discharge exam or review
  • Veterans eligible for compensation but not receiving it due to being on active duty
  • Surviving spouses eligible for VA loans

If the borrower’s exemption status is unclear, the VA will make the final decision on funding fee exceptions.

How to Qualify for a VA Loan

VA loans are available to active-duty service members, veterans and their surviving spouses. If you meet one or more of the following criteria, you may be eligible for a VA home loan:

  • Service totaling 181 days or more of active service during peacetime
  • Service totaling 90 consecutive days or more of active service during wartime
  • Service totaling six years or more in the National Guard or Reserves or served 90 days (at least 30 of them consecutively) under Title 32 orders
  • You suffered a service-connected disability
  • You are the spouse of a military member who died while on active duty or from service-connected causes

VA Loan Benefits

VA home loans are valuable financing solutions to help qualified service members and veterans achieve their homeownership aspirations. The primary benefits of VA home loans include:

  • No down payment requirement on home purchase loans. Buy your home sooner or use your savings for other expenses.
  • Lower interest rates. Interest rates are lower than conventional loans, making homeownership more affordable.
  • No monthly mortgage insurance premiums. Purchase a home and start building equity without the extra expense of monthly mortgage insurance.
  • Less stringent credit requirements. While there are specific financial criteria you’ll need to meet, perfect credit isn’t required, making homeownership more attainable and accessible.

Types of VA Loans

Veterans and service members have access to several types of VA loans, whether you’re buying a home or refinancing.

VA Purchase Loan

Buy a home with zero down payment and a competitive interest rate.

Who is it for? Qualified first-time or repeat homebuyers who are purchasing a primary residence.

Benefits:

  • No down payment, unlike conventional or FHA loans*
  • No private mortgage insurance (PMI) or upfront mortgage insurance premium (UFMIP) to keep your monthly payments low
  • Lower interest rates
  • Borrowers can choose to finance the VA funding fee into the loan

*As long as the sales price does not exceed the appraised home value.

VA Interest Rate Reduction Refinance Loan (IRRRL)

An IRRRL, also known as a Streamline Refinance Loan, allows you to refinance your existing VA loan to a lower interest rate, which may potentially lower your monthly payments. You may also be able to refinance an ARM into a fixed-rate mortgage.

Who is it for? Individuals who already have a VA loan.

Benefits:

  • Lower interest rates compared to conventional loans
  • Designed to be easy to apply and quickly close
  • Flexible loan terms — there’s no need to extend your current payment schedule
  • Minimal paperwork and income documentation required
  • No appraisal
  • More flexible eligibility requirements
  • No out-of-pocket cost refinance options are available to qualifying borrowers. Does not apply to taxes, insurance or pre-paid interest.
  • Option to reduce mortgage term without significant payment increases

Your rate and monthly payment after refinancing must be lower than your current payment, except when refinancing an ARM to a fixed-rate mortgage.

VA Cash-Out Refinance

VA cash-out refinance loans allow you to refinance your existing loan — which doesn’t have to be a VA loan — for a higher balance and receive the difference as cash. Use the funds for any purpose, such as paying off debt, funding education or making home improvements.

Who is it for? Qualified veteran homeowners who want to use their equity in their homes.

Benefits:

  • Pay off higher interest rate debt, such as credit cards
  • It can be used to refinance a non-VA loan into a VA loan
  • Pennymac will lend up to 90% of the value of your home*
  • Low-to-zero out-of-pocket costs
  • Only one monthly mortgage payment to make
  • Access cash from your equity and potentially lower your rate at the same time
  • Roll your closing costs into the loan

*Loan limits are established by the VA and can vary by county.

By refinancing your existing loan, your total finance charges may be higher over the life of the loan.

VA Loan Funding Options

A VA loan is a versatile, flexible financing option designed to empower veterans, service members and their families.

VA Purchase Loans

VA purchase loans can be used to finance a primary residence, including:

  • Single-family home, up to four units
  • Condominiums in a VA-approved project
  • A home that needs improvement
  • Manufactured home or lot
  • A new home build
  • Energy-efficient upgrades

VA Interest Rate Reduction Refinance Loan (IRRRL)

VA IRRRL loans are used to replace an existing VA loan at a lower interest rate. This can potentially reduce your monthly payments, freeing up money you can use for other expenses, such as home renovations, college tuition or credit card debt. You can refinance:

  • Single-family homes, up to four units
  • Condominiums
  • Manufactured homes

The home must be your primary residence, and you must already have a VA loan. You can also refinance an ARM into a fixed-rate mortgage.

VA Cash-Out Refinance

With a VA cash-out refinance, you may be able to obtain funds for:

  • Home improvements, repairs and renovations
  • Education
  • Consolidating debt
  • Managing other large expenses

You can also use a VA cash-out refinance to replace a non-VA loan with a VA loan. The home you are refinancing must be your primary residence.

Apply for a VA Loan

As part of our nation’s military, you’ve dedicated your life to serving our country. Pennymac is proud to serve you. We provide VA purchase loans and refinancing options that can make homeownership more attainable and affordable for America’s heroes. Contact a Pennymac Loan Expert today to learn more.

*Lock & Shop Program allows consumers who have a Pennymac BuyerReady Certification for a purchase loan with Pennymac to lock a rate prior to locating a property. The program requires a non-refundable fee of $595 due at the time of the rate lock. Consumers with a Pennymac BuyerReady Certification for a purchase loan with Pennymac must meet appropriate underwriting conditions to obtain a mortgage loan. Consumers may choose between a 60-day, 75-day or 90-day lock period. Consumers must initiate a mortgage loan application for a specific property and be under purchase contract for the property at least 30 days prior to lock expiration in order to extend the locked rate. All rate lock extensions are subject to Pennymac’s standard rate lock extension fees. After the rate lock and subject to favorable market conditions, consumers may be eligible for a one-time reduction in rate once the loan application for a specific property has been initiated (0.50 % maximum reduction in interest rate allowed). Eligible loan products are Conventional Fixed, Conventional ARM, FHA Fixed and VA Fixed. Program excludes Jumbo, refinance, third-party and in-process loans. Program subject to termination in Pennymac’s sole discretion and without notice.

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Source: pennymac.com

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Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.

Mortgage rates are nearly flat from last week, and they’ve held surprisingly steady this month even as some of the latest economic data has led investors to tweak their expectations around future Federal Reserve rate cuts.

Average 30-year mortgage rates remained around 6.31% this week, down just six points from last week’s average of 6.37%, according to Zillow data.

After dropping substantially toward the end of 2023, mortgage rates are expected to go down further in 2024. But when exactly they’ll start dropping hinges on when the Fed decides to start cutting the federal funds rate.

At its last meeting, the Fed indicated it could cut rates at least three times this year. The Fed first started aggressively raising rates in 2022 to try and tackle too-high inflation. Its efforts have brought inflation down significantly, but they also put a lot of upward pressure on mortgage rates, causing them to skyrocket. 

Mortgage rates have already dropped somewhat in anticipation of coming Fed cuts. But they might not drop any further until we get closer to a likely cut. Currently, investors are pricing in a 50% likelihood of the Fed cutting rates at its March meeting, according to the CME FedWatch Tool.

The Fed has its first meeting of 2024 at the end of this month. While we most likely won’t see the Fed cut rates at this meeting, we may get some hints regarding when it might. If a rate cut in March seems likely, mortgage rates could trend down a bit. But if officials suggest we might not see a cut until the following meeting in May or later, mortgage rates will likely remain near their current levels.

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Mortgage Calculator

Use our free mortgage calculator to see how today’s mortgage rates will affect your monthly and long-term payments.

Mortgage Calculator

$1,161
Your estimated monthly payment

Total paid$418,177
Principal paid$275,520
Interest paid$42,657
  • Paying a 25% higher down payment would save you $8,916.08 on interest charges
  • Lowering the interest rate by 1% would save you $51,562.03
  • Paying an additional $500 each month would reduce the loan length by 146 months

By plugging in different term lengths and interest rates, you’ll see how your monthly payment could change.

30-Year Fixed Mortgage Rates

The average 30-year fixed mortgage rate was 6.60% last week, according to Freddie Mac. This is a six-basis-point decrease from the week before.

The 30-year fixed-rate mortgage is the most common type of home loan. With this type of mortgage, you’ll pay back what you borrowed over 30 years, and your interest rate won’t change for the life of the loan.

The lengthy 30-year term allows you to spread out your payments over a long period of time, meaning you can keep your monthly payments lower and more manageable. The trade-off is that you’ll have a higher rate than you would with shorter terms or adjustable rates. 

15-Year Fixed Mortgage Rates

Average 15-year mortgage rates were 5.76% last week, according to Freddie Mac data, which is an 11-basis-point drop from the previous week.

If you want the predictability that comes with a fixed rate but are looking to spend less on interest over the life of your loan, a 15-year fixed-rate mortgage might be a good fit for you. Because these terms are shorter and have lower rates than 30-year fixed-rate mortgages, you could potentially save tens of thousands of dollars in interest. However, you’ll have a higher monthly payment than you would with a longer term.

Are Mortgage Rates Going Down?

Mortgage rates increased throughout most of 2023. But mortgage rates are expected to trend down in the coming months and years.

In the last 12 months, the Consumer Price Index rose by 3.4%. As inflation comes down and the Federal Reserve is able to start cutting the federal funds rate, mortgage rates should fall further as well.

For homeowners looking to leverage their home’s value to cover a big purchase — such as a home renovation — a home equity line of credit (HELOC) may be a good option while we wait for mortgage rates to ease. Check out some of our best HELOC lenders to start your search for the right loan for you.

A HELOC is a line of credit that lets you borrow against the equity in your home. It works similarly to a credit card in that you borrow what you need rather than getting the full amount you’re borrowing in a lump sum. It also lets you tap into the money you have in your home without replacing your entire mortgage, like you’d do with a cash-out refinance.

Current HELOC rates are relatively low compared to other loan options, including credit cards and personal loans. 

How Do Fed Rate Hikes Affect Mortgages?

The Fed aggressively raised the federal funds rate in 2022 and 2023 to slow economic growth and get inflation under control. As a result, mortgage rates spiked.

Mortgage rates aren’t directly impacted by changes to the federal funds rate, but they often trend up or down ahead of Fed policy moves. This is because mortgage rates change based on investor demand for mortgage-backed securities, and this demand is often impacted by how investors expect Fed hikes to affect the broader economy. 

Now that the Fed has paused hiking rates, mortgage rates have come down a bit. Once the Fed starts cutting rates, which is likely to happen this year, mortgage rates should fall even further.

Molly Grace

Mortgage Reporter

Source: businessinsider.com

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Both a loan modification and a loan refinance can lower your monthly payments and help you save money. However, they are not the same thing. Depending on your circumstances, one strategy will make more sense than the other.

If you’re behind on your mortgage payments due to a financial hardship, for example, you might seek out a loan modification. A modification alters the terms of your current loan and can help you avoid default or foreclosure.

If, on the other hand, you’re up to date on your loan payments and looking to save money, you might opt to refinance. This involves taking out a new loan (ideally with better rates and terms) and using it to pay off your existing loan.

Here’s a closer look at loan modification vs. refinance, how each lending option works, and when to choose one or the other.

What Is a Loan Modification?

A loan modification changes the terms of a loan to make the monthly payments more affordable. It’s a strategy that most commonly comes into play with mortgages. A home loan modification is a change in the way the home mortgage loan is structured, primarily to provide some financial relief for struggling homeowners.

Unlike refinancing a mortgage, which pays off the current home loan and replaces it with a new one, a loan modification changes the terms and conditions of the current home loan. These changes might include:

•   A new repayment timetable. A loan modification may extend the term of the loan, allowing the borrower to have more time to pay off the loan.

•   A lower interest rate. Loan modifications may allow borrowers to lower the interest rates on an existing loan. A lower interest rate can reduce a borrower’s monthly payment.

•   Switching from an adjustable rate to a fixed rate. If you currently have an adjustable-rate loan, a loan modification might allow you to change it to a fixed-rate loan. A fixed-rate loan may be easier to manage, since it offers consistent monthly payments over the life of the loan.

A loan modification can be hard to qualify for, as lenders are under no obligation to change the terms and conditions of a loan, even if the borrower is behind on payments. A lender will typically request documents to show financial hardship, such as hardship letters, bank statements, tax returns, and proof of income.

While loan modifications are most common for secured loans, like home mortgages, it’s also possible to get student loan modifications and even personal loan modifications.
💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

What Is Refinancing a Loan?

A loan refinance doesn’t just restructure the terms of an existing loan — it replaces the current loan with a new loan that typically has a different interest rate, a longer or shorter term, or both. You’ll need to apply for a new loan, typically with a new lender. Once approved, you use the new loan to pay off the old loan. Moving forward, you only make payments on the new loan.

Refinancing a loan can make sense if you can:

•   Qualify for a lower interest rate. The classic reason to refi any type of loan is to lower your interest rate. With home loans, however, you’ll want to consider fees and closing costs involved in a mortgage refinance, since they can eat into any savings you might get with the lower rate.

•   Extend the repayment terms. Having a longer period of time to pay off a loan generally lowers the monthly payment and can relieve a borrower’s financial stress. Just keep in mind that extending the term of a loan generally increases the amount of interest you pay, increasing the total cost of the loan.

•   Shorten the loan repayment time. While refinancing a loan to a shorter repayment term may increase the monthly loan payments, it can reduce the overall cost of the loan by allowing you to pay off the debt faster. This can result in a significant cost savings.

Recommended: What Are Personal Loans Used For?

Refinance vs Loan Modification: Pros and Cons

Loan refinance is typically something a borrower chooses to do, whereas loan modification is generally something a borrower needs to do, often as a last resort.

Here’s a look at the pros and cons of each option.

Loan Modification Refinancing
Pros Cons Pros Cons
Avoid loan default and foreclosure Could negatively impact credit May be able to lower interest rate You’ll need solid credit and income
Lower your monthly payment Cash out is not an option May be able to shorten or lengthen your loan term Closing costs may lower overall savings
Avoid closing costs Lenders not required to grant modification May be able to turn home equity into cash You could reset the clock on your loan

Benefits of Loan Modification

While a loan modification is rarely a borrower’s first choice, it comes with some advantages. Here are a few to consider.

•   Avoid default and foreclosure. Getting a loan modification can help you avoid defaulting on your mortgage and potentially losing your home as a result of missing mortgage payments.

•   Change the loan’s terms. It may be possible to increase the length of your loan, which would lower your monthly payment. Or, if the original interest rate was variable, you might be able to switch to a fixed rate, which could result in savings over the life of the loan.

•   Avoid closing costs. Unlike a loan refinance, a loan modification allows you to keep the same loan. This helps you avoid having to pay closing costs (or other fees) that come with getting a new loan.

Drawbacks of Loan Modification

Since loan modification is generally an effort to prevent foreclosure on the borrower’s home, there are some drawbacks to be aware of.

•   It could have a negative effect on your credit. A loan modification on a credit report is typically a negative entry and could lower your credit score. However, having a foreclosure — or even missed payments — can be more detrimental to a person’s overall creditworthiness.

•   Tapping home equity for cash is not an option. Unlike refinancing, a loan modification cannot be used to tap home equity for an extra lump sum of cash (called a cash-out refi). If your monthly payments are lower after modification, though, you may have more funds to pay other expenses each month.

•   There is a hardship requirement. It’s typically necessary to prove financial hardship to qualify for loan modification. Lenders may want to see that your extenuating financial circumstances are involuntary and that you’ve made an effort to address them, or have a plan to do so, before considering loan modification.

Recommended: Guide to Mortgage Relief Programs

Benefits of Refinancing a Loan

For borrowers with a strong financial foundation, refinancing a mortgage or other type of loan comes with a number of benefits. Here are some to consider.

•   You may be able to get a lower interest rate. If your credit and income is strong, you may be able to qualify for an interest rate that is lower than your current loan, which could mean a savings over the life of the loan.

•   You may be able to shorten or extend the term of the loan. A shorter loan term can mean higher monthly payments but is likely to result in an overall savings. A longer loan term generally means lower monthly payments, but may increase your costs.

•   You may be able to pull cash out of your home. If you opt for a cash-out refinance, you can turn some of your equity in your home into cash that you can use however you want. With this type of refinance, the new loan is for a greater amount than what is owed, the old loan is paid off, and the excess cash can be used for things like home renovations or credit card consolidation.
💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.

Drawbacks of Refinancing a Loan

Refinancing a loan also comes with some disadvantages. Here are some to keep in mind.

•   You’ll need strong credit and income. Lenders who offer refinancing typically want to see that you are in a solid financial position before they issue you a new loan. If your situation has improved since you originally financed, you could qualify for better rates and terms.

•   Closing costs can be steep. When refinancing a mortgage, you typically need to pay closing costs. Before choosing a mortgage refi, you’ll want to look closely at any closing costs a lender charges, and whether those costs are paid in cash or rolled into the new mortgage loan. Consider how quickly you’ll be able to recoup those costs to determine if the refinance is worth it.

•   You could set yourself back on loan payoff. When you refinance a loan, you can choose a new loan term. If you’re already five years into a 30-year mortgage and you refinance for a new 30-year loan, for example, you’ll be in debt five years longer than you originally planned. And if you don’t get a lower interest rate, extending your term can increase your costs.

Is It Better to Refinance or Get a Loan Modification?

It all depends on your situation. If you have solid credit and are current on your loan payments, you’ll likely want to choose refinancing over loan modification. To qualify for a refinance, you’ll need to have a loan in good standing and prove that you make enough money to absorb the new payments.

If you’re behind on your loan payments and trying to avoid negative consequences (like loan default or foreclosure on your home), your best option is likely going to be loan modification. Provided the lender is willing, you may be able to change the rate or terms of your loan to make repayment more manageable. This may be more agreeable to a lender than having to take expensive legal action against you.

Recommended: 11 Types of Personal Loans & Their Differences

Alternatives to Refinancing and Loan Modification

If you’re having trouble making your mortgage payments or just looking for a way to save money on a debt, here are some other options to consider besides refinancing and loan modification.

Mortgage Forbearance

For borrowers facing short-term financial challenges, a mortgage forbearance may be an option to consider.

Lenders may grant a term of forbearance — typically three to six months, with the possibility of extending the term — during which the borrower doesn’t make loan payments or makes reduced payments. During that time, the lender also agrees not to pursue foreclosure.

As with a loan modification, proof of hardship is typically required. A lender’s definition of hardship may include divorce, job loss, natural disasters, costs associated with medical emergencies, and more.

During a period of forbearance, interest will continue to accrue, and the borrower will still be responsible for expenses such as homeowners insurance and property taxes.

At the end of the forbearance period, the borrower may have to repay any missed payments in addition to accrued interest. Some lenders may work with the borrower to set up a repayment plan rather than requiring one lump repayment.

Mortgage Recasting

With a mortgage recast, you make a lump sum payment toward the principal balance of the loan. The lender will then recast, or re-amortize, your remaining loan repayment schedule. Since the principal amount is smaller after the lump-sum payment is made, each monthly payment for the remaining life of the loan will be smaller, even though your interest rate and term remain the same.

Making Extra Principal Payments

With any type of loan, you may be able to lower your borrowing costs by occasionally (or regularly) making extra payments towards principal. This can help you pay back what you borrowed ahead of schedule and reduce your costs.

Before you prepay any type of loan, however, you’ll want to make sure the lender does not charge a prepayment penalty, since that might wipe out any savings. You’ll also want to make sure that the lender applies any extra payments you make directly towards principal (and not towards future monthly payments).

The Takeaway

Loan modification vs loan refinancing…which one wins?

It depends on your financial situation. If you’re dealing with financial challenges and at risk of home foreclosure, you may want to look into a loan modification, which could be easier to qualify for than loan refinancing.

If you’re interested in getting a lower interest rate or lowering your monthly debt payment, refinancing likely makes more sense. A refinance may also make sense if you’re looking to tap your home equity to access extra cash. With a cash-out refi, you replace your current mortgage with a new, larger loan and receive the excess amount in cash.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.

FAQ

What are the disadvantages of loan modification?

A loan modification typically comes with a hardship requirement. A lender may ask to see proof that your financial circumstances are involuntary and that you’ve made an effort to address them before considering loan modification.

A loan modification can also have a temporary negative effect on your credit.

Is a loan modification bad for your credit?

A lender may report a loan modification to the credit bureaus as a type of settlement or adjustment to the loan’s terms, which could negatively impact on your credit. However, the effect will likely be less (and shorter in duration) than the impact a series of late or missed payments or a foreclosure on your home would have.

Photo credit: iStock/AlexSecret

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Source: sofi.com

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Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.

Interest rates for the most popular 30-year fixed mortgage averaged around 6.43% in December 2023, according to Zillow data. Rates for 15-year mortgages, which are also relatively popular, were 5.75%.

The average monthly mortgage payment is currently $2,883 for a 30-year fixed mortgage, based on recent home price and mortgage rate data.

Mortgage rates are always changing, and there are a lot of factors that can sway your interest rate. While some of them are personal factors you have control over, and some aren’t, it’s important to know what your interest rate could look like as you start the process of getting a home loan. 

Most experts believe that mortgage rates will go down in 2024.

Average mortgage rates today

While average mortgage and refinance rates can give you an idea of where rates are currently at, remember that they’re never a guarantee of the rate a lender will offer you. Mortgage interest rates vary by borrower, based on factors like your credit, loan type, and down payment.

To get the best rate for you, you’ll want to get quotes from multiple lenders.

Average mortgage interest rate by mortgage type

Purchase mortgage

The rates you’ll get on a mortgage used to purchase a home are often better than what you’ll be quoted for a refinance. They generally differ by the loan’s length in years, and whether the interest rate is fixed or adjustable. Two of the most popular types include:

  • 30-year mortgage rates: The most popular type of mortgage, this home loan makes for low monthly payments by spreading the amount over 30 years. 
  • 15-year mortgage rates: Interest rates and payments won’t change on this type of loan, but it has higher monthly payments since payments are spread over 15 years. However, it comes with lower rates than a 30-year loan.

Mortgage refinance

Mortgage refinance rates typically differ somewhat from purchase rates, and may be slightly higher — particularly if you’re getting a cash-out refinance, since these are considered riskier.

If you’re considering a refinance, be sure to shop around with the best mortgage refinance lenders and get multiple rate quotes to be sure you’re getting the best deal.

  • 30-year mortgage refinance rates: Refinancing into a 30-year term can lower your monthly payment since you’re spreading out what you owe over a longer period of time.
  • 15-year mortgage refinance rates: Refinancing into a shorter term like a 15-year mortgage will increase your monthly payment, but help you save on interest.

Home equity line of credit (HELOC)

HELOC rates are generally a little higher than rates on first mortgages, but they can still be worth it if you’re looking to tap into your home’s equity without having to take on a new rate on your main mortgage.

As with other types of mortgages, you’ll want to shop around and get multiple rate quotes to find the best HELOC lenders.

Average mortgage interest rate by credit score

National rates aren’t the only thing that can sway your mortgage interest rates — personal information like your credit score also can affect the price you’ll pay to borrow. 

See Insider’s picks for the best mortgage lenders »

The higher your score is, the less you’ll pay to borrow money. Generally, 620 is the minimum credit score needed to buy a house, with some exceptions for government-backed loans.

Data from credit scoring company FICO shows that the lower your credit score, the more you’ll pay for credit. Here’s the average interest rate by credit level for a 30-year fixed-rate mortgage of $300,000, as of January 2024:

According to FICO, only people with credit scores above 660 will truly see interest rates around the national average. 

Average mortgage interest rate by year

Mortgage rates are constantly in flux, largely affected by what’s happening in the greater economy. Things like inflation, the bond market, overall housing market conditions, and Federal Reserve policy impact mortgage rates. 

Here’s how the average mortgage interest rate has changed over time, according to data from Freddie Mac.

Throughout 2020, the average mortgage rate fell drastically due to the economic impact of the coronavirus crisis. Rates throughout 2020 and into 2021 were lower than rates at the depths of the Great Recession. Thirty-year fixed mortgage interest rates hit a low of 2.65% in January 2021, according to Freddie Mac. Rates began to rise again in 2022.

Most major forecasts expect rates to start dropping throughout the next couple of years, and they could ultimately end up somewhere in the 5% range.

Average mortgage interest rate by state

Check the latest rates in your state at the links below. 

AlabamaAlaskaArizonaArkansasCaliforniaColoradoConnecticutDelawareFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington Washington, DC West Virginia Wisconsin Wyoming

How are mortgage rates determined?

Multiple factors affect the interest rate you’ll pay on a mortgage. Some are outside of your control. Others you can influence.

For instance, the federal funds rate — the interest rate banks charge when they lend to each other — has an influence on all sorts of other interest rates, including those on mortgages. The Federal Reserve adjusts the federal funds rate as part of its effort to control inflation. Therefore, it’s a factor that is beyond your control.

Key determining factors that you do have control over include:

  1. Your credit score
  2. Debt-to-income ratio
  3. The amount of your down payment
  4. The type of mortgage you get
  5. The amount of time you take to pay off the loan

What to know before getting a mortgage

A mortgage is a type of secured loan used to purchase a home. You pay back the lender over an agreed-upon amount of time, including an additional interest payment, which you can consider the price of borrowing money.

(You can also pay off your mortgage early, but there are both pros and cons to be aware of.)

Because a mortgage is a secured loan, it means you put your property up as collateral. Should you fail to make your payments over time, the lender can foreclose on, or repossess, your property.

Frequently asked questions about average mortgage rates

A mortgage rate, also known as a mortgage interest rate, is the fee charged by your lender for loaning you money. Your principal (payments on the amount of money you borrowed) and interest are rolled into one payment each month.

In December 2023, 30-year mortgage rates averaged 6.43%, and they’ve been trending even lower this month.

Compared to where rates were just a couple of years ago, a 7% mortgage rate is extremely high. But now, many borrowers who got their mortgage in the last year likely have rates of 7% or higher. Fortunately, rates have eased somewhat in recent months, and are now back below this benchmark.

Average mortgage rates nearly reached 8% in October of 2023, but they’ve since come down. However, rates can vary a lot depending on your finances. If you have a lower credit score, you could still get a rate that’s near 8%. Rates are expected to decrease this year, so we likely won’t see average rates reach 8%. 

The last time mortgage rates were at 8% was in August 2000, when the average 30-year mortgage rate was 8.04%, according to Freddie Mac.

The better your credit score, the better the rate you’ll get on your mortgage. To access the best mortgage interest rates, aim to have a credit score at least in the 700s.

Mortgage rates fluctuate all the time. The best way to get a good mortgage rate is to get quotes from at least three different mortgage lenders and compare them. That way, you’ll know you’re likely getting a good rate. If you’re having trouble getting a lower rate, you might want to first take some time to work on your credit or pay down debt.

A discount point is a fee you can choose to pay at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 6.5% and you pay $4,000 for two discount points, your new interest rate is 6%.

Because mortgage interest rates are so individual to the borrower, the best way to find the rates available to you is to get quotes from multiple lenders. If you’re early in the homebuying process, apply for prequalification and/or preapproval with several lenders to compare and contrast what they’re offering.

Mortgage interest rates are expected to fall soon, but when and how much depends on the path of inflation; if price growth continues to slow, rates should fall in the coming months. If inflation remains stubborn, we may have to wait a bit longer. But that doesn’t mean you need to put off your homebuying plans — there are plenty of advantages to buying a house when rates are high, such as decreased competition.

Liz Knueven

Personal Finance Reporter

Laura Grace Tarpley, CEPF

Personal Finance Reviews Editor

Source: businessinsider.com