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Refinancing when mortgage rates are at historically low levels can help you secure a lower interest rate and reduce the amount of interest you pay over the life of the loan. Here are some things to keep in mind when considering refinancing. (iStock)
Deciding whether to refinance your mortgage when interest rates drop is often an easy decision. But in an environment of rising interest rates, you may be asking yourself, “Should I refinance my mortgage now or wait until interest rates fall again?”
The answer depends a lot on your situation. Before refinancing your mortgage, you should consider several factors.
Credible lets you compare mortgage refinancing rates from different lenders in minutes.
Is now an opportunity to refinance?
In general, refinancing your mortgage is a smart choice if it saves you money. If you can reduce interest rates by at least 1%, you should consider this strategy.
For example, you have a 30-year $250,000 mortgage with a fixed interest rate of 4.25% and monthly payments of $1,229.85 for 5 years. By refinancing to a new 30-year loan with an interest rate of 3.25%, you can reduce your payments by more than $241, saving you more than $11,003 over the life of the loan.
Use Credible’s Mortgage Refinance Calculator to help you understand how refinancing will affect your monthly payments.
Why should I refinance?
Refinancing may allow you to save interest, pay off your mortgage faster, switch to a different loan type, or take advantage of your home equity. Before applying, it’s important to know your main goals.
save interest
With low interest rates, you can lower your monthly mortgage payments while saving interest. Calculate the interest cost of your current loan and new mortgage before refinancing.
pay off the loan early
By refinancing to a shorter term loan, you can own your home faster for free. Paying off your mortgage allows you to focus on other financial goals, like retirement or saving for college. Your monthly payments may increase because you’re paying off your debt in a short period of time, but you’ll save a lot on interest in the long run.
Change to another loan type
You can also refinance an adjustable rate mortgage (ARM) for a fixed rate loan and vice versa. Refinancing to a fixed-rate loan means you don’t have to worry about interest rates rising and it’s easier to budget your payments.
Conversely, moving from a fixed rate loan to ARM may be worth it if interest rates drop and you don’t think you’ll be staying at home for long.
Should I refinance my variable rate mortgage now?
use home equity
Through cash out refinancing, you can leverage your home equity just like you would with a home equity loan or home equity line of credit (HELOC). With a cash out refinance, you take out a new mortgage for more than your current balance and pocket the difference. While your mortgage balance grows, you can also use the extra cash to pay for home improvements, student loan debt, and more.
Whether you’re looking to purchase cash out refinance or traditional refinance rates, Credible can help. Credible makes it easy to compare refinancing options from different lenders.
How much does it cost to refinance?
Refinancing costs money. But in some circumstances it may be worth it. If you choose to refinance, you will incur closing costs that include costs such as loan processing and home appraisals. Closing costs can run between 2% and 5% of the total loan amount.
Here is an overview of the fees you can expect when refinancing:
- loan origination fee — The origination fee is designed to cover the costs of processing, underwriting and closing a mortgage. You typically pay 0.5% to 1.5% of the total loan amount.
- appraisal fee — A home appraisal is required to determine the value of your property. Valuations are typically between $300 and $500.
- title premium — This fee is for a new title insurance policy that must be purchased when refinancing. The average cost for him is $1,000, but it depends on the location and the amount of the loan.
- credit check fee — The lender sees how much risk they are willing to lend to you by drawing out your credit. Credit check fees are typically less than $30. Some lenders may waive this fee.
- prepaid interest — Lenders may ask you to prepay the first month’s interest when closing a new mortgage. The timing of the settlement and the interest rate determine the amount you pay.
- recording fee — Recording fees that vary by location cover the cost of recording your home within the county.
- mortgage point — In some cases, you will have to pay “extra points” to reduce the interest rate. 1 point equals 1% of the loan amount, so if he has a $400,000 mortgage, 1 point is his $4,000.
Some lenders also offer no closing costs refinancing loans for those with a current mortgage. This is when the lender rolls the closing costs back into the mortgage amount, which can be paid over time rather than up front.
How to know the break-even point
The break-even point tells you how long it will take to recoup your refinancing costs. To calculate it, divide the closing cost amount by the monthly savings amount.
For example, let’s say your monthly payment is reduced by $241. It takes about 21 months to break even on a $5,000 closing cost. If you’re thinking of selling your home and moving before you hit breakeven, refinancing may not be worth it.
How to refinance your home loan and save big
How long does it take to refinance?
A mortgage refinance typically takes 30-45 days to complete, but the process can be longer or shorter depending on the property, financial complexity, and current market. To make sure you don’t miss out on a good mortgage rate, you can lock your interest rate for a period of time, about 30-60 days.
When should I refinance?
Refinancing your mortgage is probably worth your time and money in the following situations:
your credit score goes up
A higher credit score means lenders know you’re a responsible borrower and opens the door to lower interest rates. If your score has improved since you first took out your mortgage, refinancing to a lower rate could save you hundreds or thousands of dollars in interest.
When is the right time to refinance your mortgage?
Low interest rates available
Higher interest rates increase the overall cost of a mortgage. If your credit score has gone up or your mortgage refinancing rate has gone down so you can lock in a lower interest rate, you may be a good candidate for a mortgage refinance. Lower interest rates mean lower monthly payments, which in turn reduces the total amount of interest you pay over the life of the loan.
ARM is about to be reset
ARM locks a low fixed rate for a period of time. At the end of that period, the interest rate will reset to the higher prevailing interest rate.
It’s a good idea to refinance your variable rate mortgage before resetting it to the new rate, especially if you know the new interest rate will be significantly higher and impact your monthly budget. You can also refinance if you prefer the stability of your mortgage payments that won’t change.
If you decide it’s the right time to refinance, use Credible to compare lenders and interest rates. You can discuss your options with a mortgage expert.
