Is Now a Good Time to Refinance Your Mortgage?

Is Now a Good Time to Refinance Your Mortgage?
Written by Publishing Team

Even with rising mortgage rates, many homeowners can still improve their finances by refinancing – albeit much less than they were just weeks ago.

At current mortgage rates, 7.1 million mortgage holders could cut the interest rate by at least 0.75 percentage points and would be well qualified to do so. That’s down from 11 million borrowers at the end of December and from a high of about 20 million in 2020, according to mortgage data provider Black Knight.

After hovering just above 3% through December, Mortgage Rates jumped by nearly a third of a percentage point in the first two weeks of January, reaching 3.45% last week. This is the highest average rate since March 2020.

Despite the rate increase, the millions of homeowners who are still willing to take advantage can save a lot of money.

These homeowners can save nearly $2 billion a month. This works out to average monthly savings of $273 and annual savings of $3,276 per borrower. About 1.3 million of these homeowners can save at least $400 a month, while 767,000 can save $500 a month or more.

The key to refinancing or not will be to compare the monthly savings offered against the costs involved in getting a new home loan. With the amount of potential savings involved, it makes sense to at least run the numbers and see if a reference is the best option. We’ll guide you through the steps needed to help you make this decision.

Maintain a lower interest rate by refinancing your mortgage.

For borrowers with a strong credit history, refinancing can be a good way to get a lower interest rate. Click on your state to get a free quote.

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If your mortgage rate is above 4.45%, this is probably a good time to refinance

Mortgage rates for well-qualified borrowers have hovered around 3% for the past four months. The current average for a 30-year fixed-rate loan is 3.45%.

One indication that refinancing is a good idea is that you can lower your current interest rate by at least 0.5% to 1%.

If you have a $300,000 balance on your mortgage and you refinance for a new 30-year loan, lowering the interest rate from 3.75% to 3.25% will save about $84 per month or $1,008 per year. If you could reduce the rate by 1%, from 3.75% to 2.75%, your monthly savings would be $165 per month or $1,980 per year.

Of course, you do not have to refinance into another 30-year loan. If your finances improve and you can afford higher monthly payments, you can refinance your 30 year loan into a 15 year fixed rate mortgage, which will allow you to pay off the loan faster and also pay lower interest.

However, looking at your monthly savings is just one part of the reference equation. You also need to factor in the cost of switching your loan and how long it will take to recoup those costs, or the “break-even point.”

Just like with a purchase loan, you will have to pay closing costs on the refinancing. These costs can include construction and application fees, appraisal and inspection costs, and property search fees. In general, closing costs can range from 3% to 6% of the total amount of the refinanced loan.

You can determine your break-even point by dividing your total closing costs by the amount you’ll save each month. The result is the number of months it will take to recoup the cost of refinancing and start saving money. The less time it takes to break even, the more reasonable it will be to refinance your home loan.

The final piece of the refi puzzle is balancing your refinancing goals with the change in the term of the loan. For example, if you have 10 years of a 30-year mortgage, refinancing into another 30-year loan means you’ll pay off a 40-year mortgage instead of 30 years.

If the primary reason is to reduce your monthly payments, refinancing into another 30 mortgages makes sense. However, if your goal is to save on interest and reduce the term of your loan, a 30- to 15-year mortgage refinance may be the best option, as long as you can afford the higher monthly payments. Use our mortgage refinance calculator to find out what might work for you.

Are Mortgage Refinance Rates Still Low?

When the COVID-19 pandemic first emerged in March 2020, the Federal Reserve instituted monetary policy to help stabilize financial markets and mitigate the economic impact of the virus. Part of that policy involved reducing the federal funds rate — the interest rate banks charge each other for short-term loans — to near zero.

The Fed also pledged to buy $40 billion in mortgage-backed securities, and $80 billion in Treasuries and other financial instruments each month to pump money into the economy and encourage investment and lending.

However, as the economy continued to show signs of improvement, the central bank announced at its November meeting that it would begin to scale back its asset purchase program. The Fed has begun reducing its Treasury purchases by $10 billion per month and MBS by $5 billion per month.

The net effect of these policies was to lower mortgage rates, with the 30-year average rate dropping below 3% for the first time in history in July 2020. Rates reached a record low of 2.65% on January 7, 2021. Since then Rates trended higher but were hovering around 3%. But since the beginning of the year, rates have jumped significantly and are currently averaging 3.45%.

However, if you are considering refinancing, it may be better to act sooner rather than later. Most economists agree that mortgage rates will rise further in 2022, with rates ending the year between 3.5% and 4%.

Is your credit history strong? Refinance your home and reap the benefits.

Keeping a lower interest rate means fewer payments and more savings. looks good? Get a free quote by clicking below.

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How do you know when to refinance your mortgage

Here are some key points to consider when deciding to refinance your mortgage:

  • Your credit score. With most mortgage lenders, you will need a credit score of at least 620 to qualify for a mortgage refinance. To get the lowest mortgage rate, you’ll need 740. Also keep in mind that if your balance is lower than it was when you took out your current mortgage, you may not qualify for an adequate rate as you did before.
  • for you Debt to Income Ratio (DTI). For conventional loans, some lenders will work with a DTI of up to 43%. FHA loans will go up a bit, and DTIs usually accept 50%. However, less is generally better.
  • How long will you stay?. When you refinance, you will need to pay closing costs. If you plan to exit in the near future, you may not get the break even point.
  • How much equity do you have in your home? In order to qualify for a mortgage refinance, you generally need to have at least 20% of the equity in your home.

Don’t try to time the market. Waiting for price fluctuations is as annoying as the timing of the stock market. Don’t wait to see what happens with mortgage rates tomorrow if you can save money or get closer to your financial goals by refinancing today.

Want to lower your mortgage payments? Refinancing can help!

Mortgage refinancing has never been easier, and with interest rates near all-time lows, now may be the perfect opportunity to explore your options. Click on the image below to find out more.

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Frequently Asked Questions About Mortgage Refinance

Are refinancing rates going down?

While current mortgage rates remain low, most mortgage experts expect rates to continue rising over the coming months and years. The Federal Reserve is expected to start raising short-term interest rates in 2022. The Federal Reserve does not set mortgage rates, but lenders tend to raise the rate to borrow money when the Fed acts.

Why would refinancing be a bad idea?

Refinancing is a bad idea if it does not represent some kind of gain, be it in the form of lower monthly payments or savings in interest by reducing the term of the loan. If the interest rate offered is not at least 0.5% lower than your current rate, it probably won’t be worth the cost of the reference. Another reason not to refinance is if you plan to sell the home before you hit the breakeven point or if your new monthly payment is more than you can comfortably afford.

Is it cheaper to refinance with an existing lender?

not nessacary. While it is possible that a solid relationship with an existing lender will lead to better rates, it is not a guarantee. Your best option for finding the best mortgage rate is to shop and consider different types of lenders, including banks, mortgage brokers, private lenders, and credit unions.

How do I get the best refinancing loan rates?

Try going through a mortgage pre-approval process with at least three lenders to find out your true rate and make sure you get the best deal. Freddie Mac found that borrowers save an average of $1,500 over the life of the loan by getting one additional quote — and an average of about $3,000 if they get five quotes.

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