- With Mortgage Rates So Low, Is Now A Good Time To Refinance?
- How will the Federal Reserve’s decision to cut rates impact mortgage rates?
- Should you refinance your mortgage?
- When did you get your current mortgage?
- How long will it take to break even on your closing costs?
- Other considerations
- When to Refinance a Mortgage: Is Now a Good Time?
- When does it make sense to refinance?
- What is a good mortgage rate?
- Is it worth refinancing for half a percent?
- Will the savings be enough to make refinancing worthwhile?
- Is it time to change the type of loan I have?
- What's changed from your last loan closing?
- Is now a good time to refinance?
- How much does it cost to refinance?
- How to know when you’ll break even
- How long does it take to refinance?
- Why should you refinance?
- To save on interest
- To pay off your loan sooner
- To change to a different loan type
- To tap into home equity
- Is Now a Good Time to Refinance My Mortgage? A Decision-Making Guide
- Do ask: What do I want to accomplish?
- Do ask: How much can I lower my rate?
- Do ask: Can I improve my application?
- Do ask: How much does it cost to refinance a mortgage?
- Do not ask: Will mortgage rates keep dropping?
- More from Money:
- Mortgage rates keep falling to record lows — so is now a good time to refinance?
- Figure out when you’ll break even
- Pay attention to the loan’s term
- Don’t be afraid of closing costs
- The tumultuous economy has made it harder to qualify
- If you received forbearance, you may hit roadblocks
- Finally, don’t try to time the market
With Mortgage Rates So Low, Is Now A Good Time To Refinance?
Updated following the Federal Reserve’s decision to cut interest rates on March 3rd, 2020.
Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from … [+] FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, March 1, 2020.
FRED, Federal Reserve Bank of St. Louis
With 30-year fixed mortgage rates currently averaging around 3.50%, it might make sense for homeowners to consider refinancing. Depending on several factors, such as your current interest rate and age of your existing mortgage, refinancing could mean a lower monthly payment and big savings over the life of the loan.
How will the Federal Reserve’s decision to cut rates impact mortgage rates?
Will mortgage rates go lower now that the Fed has cut interest rates?
The Federal Reserve has just cut interest rates by .50% in response to growing concerns about the economic impact of the coronavirus. What does that mean for mortgage rates?
The Federal Reserve does not set mortgage rates or any interest rate for that matter.
The Federal Funds rate is a suggestion of what banks should charge each other to borrow money overnight so banks can meet their reserve requirements. It is the shortest of short-term rates.
As evidenced in the chart above, the Federal Funds rate doesn’t move in lockstep with mortgage rates, particularly 30-year fixed mortgages.
Variable rate mortgages are more ly to move lower in response to today’s announcement as loans are shorter, typically over five or seven years, and typically pegged to the prime rate.
Mortgage rates are influenced by many different factors including demand from homebuyers and homeowners for new loans, current economic conditions, inflation, and demand from investors to buy mortgage loan debt. Demand for loans generally increases when rates are low, as cheap financing pushes more buyers to opt for a mortgage instead of paying cash and existing homeowners are eager to refinance.
Mortgages simultaneously serve two different clienteles: borrowers taking out a loan and investors buying that debt.
Borrowers want low rates and investors require a return that will compensate them for the risks of holding the debt (e.g. default, prepayment, etc.).
The required return will change relative to yields on other fixed income investments, the broad-based economy, and future expectations.
The best way to check current mortgage rates is to speak with a lender to discuss your financial situation and the property. Data on mortgage rates is available (at a lag) from Freddie Mac and Mortgage News Daily also publishes rates daily a survey.
Should you refinance your mortgage?
Interest rates are very low right now, so unless you bought or refinanced in 2012 or 2013, odds are your rate is higher than what you could get today, assuming no changes to your credit or income that might negatively impact your profile as a borrower. When you refinance a mortgage, you get a new loan and use the proceeds to pay off your existing mortgage. The principal is typically your current outstanding mortgage balance and the loan will be re-amortized over a new period, perhaps 30 years.
Refinancing your mortgage can be a great way to increase your monthly cash flow and pay less in interest over the lifetime of the loan. But before rushing off to speak with a lender, it’s helpful to understand how the potential benefits and drawbacks of refinancing can change relative to your personal situation.
When did you get your current mortgage?
When you first start payments on a fixed-rate mortgage, most of your monthly payment is interest expense, with a much smaller amount going to pay down your principal. As the years pass, more of your fixed monthly payment will drift towards paying down the loan principal.
Since so much of your monthly payment is interest expense at the beginning, refinancing a mortgage obtained more recently can provide greater savings to homeowners over the life of the loan (all else equal) compared to individuals who have had their loan for longer, as they’ve already gone through the years with the greatest interest expense and did so at the higher rate.
Although homeowners with a newer mortgage may see greater overall savings, individuals with an older mortgage will generally see the most significant drop in their monthly payment.
As explained above, when you refinance, you’re getting a new loan. When homeowners refinance a longstanding mortgage, the new loan amount will be reflective of the principal they’ve paid to date.
Combined with a lower interest rate, the savings can be substantial.
By way of example, consider two homeowners who both purchased a home with a $500,000 loan and 4.25% interest rate. Both are now considering refinancing at 3.25%. The first owner purchased in 2010 and the second buyer obtained a loan in 2018. All else equal, the first homeowner will have a smaller monthly payment after refinancing.
Comparing the benefits of refinancing an older mortgage versus a newer loan
Kristin McKenna, Darrow Wealth Management
How long will it take to break even on your closing costs?
As you might imagine, your potential benefit from refinancing depends, in part, on how much your new interest rate will change relative to your current one. The bigger the spread the bigger the potential savings. If you’re considering refinancing, a starting point for your cost-benefit analysis should be the payback period for your closing costs.
Lenders estimate that closing costs are generally between .75% and 1% of the loan.
Although you can arrange for a zero-cost refinancing by paying a higher interest rate or rolling it into the principal, it will cost you more over the life of the loan.
Further, the additional debt isn’t tax-deductible as it exceeds the existing loan balance. To calculate how long it will take to recoup your closing costs, divide the expected closing costs by the monthly savings from refinancing.
Using the example above and assuming closing costs are 1% of the loan, the payback period for homeowner one is a little more than five months, meaning they would break even on the cost of refinancing very quickly. In other situations, it can take years to break even on the closing costs, so you’ll need to consider how long you plan to own the home before deciding to refinance.
Also note that if your home is in a living trust, you will ly need to take the home trust to refinance.
Analyzing the cumulative benefits of refinancing a mortgage is a fairly complex exercise. In addition to the considerations raised above, the following factors also come into play:
- What will you do with extra cash each month? One component of the benefit analysis is what you decide to do with the extra cash in your pocket each month. Paying down other high-cost debt or investing for financial goals can increase the benefits of refinancing, but if the money is just spent on lifestyle expenses, your upside will be limited.
- Will refinancing impact your taxes? In 2020, the standard deduction is $24,800 for married couples and half that for single filers. Given that state and local taxes are limited to $10,000 per return, mortgage interest is usually the extra push that allows taxpayers to itemize their taxes so they can benefit from charitable deductions and other deductions only available to itemizers. Consult your CPA to discuss how refinancing could impact your tax situation.
- Tax law changes: Under the 2017 tax reform, when homeowners refinance, the allowable interest will only be deductible for the remaining term of the debt that was refinanced. Previously, the interest would have been deductible for the full term of the new mortgage. Also, refinanced loans greater than $750,000 (but less than $1M) that were issued before 12/15/17 can keep their ‘grandfathered’ status for the mortgage interest deduction, provided the refinance does not increase the principal. While refinancing to a new loan with the same term as an existing mortgage won’t necessarily extend a mortgage interest deduction in perpetuity, it can offer investors greater flexibility to maintain a low monthly payment with the option—but not the obligation—to pay down the mortgage more aggressively each month.
Now may be a great time to refinance your mortgage and enjoy the flexibility of lower monthly payments. Although refinancing may seem a hassle, depending on your current situation, it could (literally) end up paying off for years to come.
When to Refinance a Mortgage: Is Now a Good Time?
Tap to learn how COVID-19 may affect mortgage shopping
Due to the coronavirus pandemic, getting a mortgage may be a bit of a challenge. Lenders are dealing with high loan demand and staffing issues that may slow down the process.
Also, some lenders have increased their fees, adjusted their minimum required credit scores or temporarily suspended certain loan products. If you can’t pay your current home loan, refer to our mortgage assistance resource.
For the latest information on how to cope with financial stress during this pandemic, see NerdWallet’s financial guide to COVID-19.
With mortgage rates near rock bottom, it's a good time to refinance a mortgage, right? Sure, in many cases, no doubt.
As a matter of fact, 17% of U.S. homeowners with a mortgage on their primary residence refinanced in 2020, according to a September NerdWallet survey conducted online by The Harris Poll among 1,413 U.S. homeowners. And nearly one-third (31%) of homeowners with a mortgage on their primary residence said they were considering refinancing within the next 12 months, according to the survey.
To know if it’s the right time to refinance, first determine how long you plan to stay in your home, consider your financial goals and know your credit score. All of these things, along with current refinance interest rates, should play a role in your decision about whether — and when — to refinance.
» MORE: How soon can you refinance a mortgage?
When does it make sense to refinance?
The usual trigger for people to start thinking about a refinance is when they notice mortgage rates falling below their current loan rate. But there are other good reasons to refinance:
- If you're looking to pay off the loan quicker with a shorter term.
- You've gained enough equity in your home to refinance into a loan without mortgage insurance.
- You're looking to tap a bit of your home equity with a cash-out refinance.
What is a good mortgage rate?
When the Federal Reserve lowers short-term interest rates, many people expect mortgage rates to follow. But mortgage rates don’t always move in lockstep with short-term rates.
Avoid focusing too much on a low mortgage rate that you read about or see advertised. Mortgage refinance rates change throughout the day, every day. And the rate you’re quoted may be higher or lower than a rate published at any given time.
Your mortgage refinance rate is primarily your credit score and the equity you have in your home.
You’re more ly to get a competitive rate as long as your credit score is good and you have proof of steady income.
» MORE: Get your credit score for free
Is it worth refinancing for half a percent?
An often-quoted rule of thumb has said that if mortgage rates are lower than your current rate by 1% or more, it might be a good idea to refinance. But that's traditional thinking, saying you need a 20% down payment to buy a house. Such broad generalizations often don't work for big-money decisions. A half-point improvement in your rate might even make sense.
Nerdy tip: A new fee on some mortgage refinance transactions took effect on December 1, 2020. This “adverse market refinance fee” amounts to a 0.5% sales tax. As of the September NerdWallet survey, 65% of U.S. homeowners hadn’t heard of the fee.
To calculate your potential savings, you’ll need to add up the costs of refinancing, such as an appraisal, a credit check, origination fees and closing costs.
Also, check whether you face a penalty for paying off your current loan early.
Then, when you find out what interest rate you could qualify for on a new loan, you’ll be able to calculate your new monthly payment and see how much, if anything, you’ll save each month.
You’ll also want to consider whether you have at least 20% equity — the difference between its market value and what you owe — in your home. Check the property values in your neighborhood to determine how much your home might appraise for now or consult a local real estate agent.
Refinancing your mortgage can be a great way to save. With NerdWallet, you can easily track your home value and see if you can save by refinancing.
Home equity matters because lenders usually require mortgage insurance if you have less than 20% equity. It protects their financial interests in the event you default. Mortgage insurance isn't cheap and it's built into your monthly payment, so be sure you wrap it into calculations of potential refinance savings.
Once you have a good idea of the costs of refinancing, you can compare your “all-in” monthly payment with what you currently pay.
Will the savings be enough to make refinancing worthwhile?
You’ll spend an average of 2% to 5% of the loan amount in closing costs, so you want to figure out how long it will take for monthly savings to recoup those costs.
This is often called the “break-even point” of a mortgage refinance. For instance, it would take 30 months to break even on $3,000 in closing costs if your monthly payment drops by $100.
If you move during those 30 months, you’ll lose money in a refinance.
» MORE: Calculate your refinance savings
Think about whether your current home will fit your lifestyle in the future. If you’re close to starting a family or having an empty nest, and you refinance now, there’s a chance you won’t stay in your home long enough to break even on the costs.
Homeowners who have already paid off a significant amount of principal should also think carefully before jumping into a refinance.
“You might reduce your mortgage rate, lower your payment and save a great deal of interest by not extending your loan term.”
If you’re already 10 or more years into your loan, refinancing to a new 30-year or even 20-year loan — even if it lowers your rate considerably — tacks on interest costs. That’s because interest payments are front-loaded; the longer you’ve been paying your mortgage, the more of each payment goes toward the principal instead of interest.
Ask your lender to run the numbers on a loan term equal to the number of years you have remaining on your current mortgage. You might reduce your mortgage rate, lower your payment and save a great deal of interest by not extending your loan term.
» MORE: When to refinance into a shorter mortgage
Is it time to change the type of loan I have?
Take your prediction on how long you’ll stay in your current home, then think about the details of your current mortgage. How those factors play off each other could have a role in your refinance decision.
Let’s say you bought a home with an adjustable-rate mortgage for an initial term of five years at around 3%. You plan to stay put for several more years. If you’re nearing the time when the adjustable rate can reset and move higher, you might benefit from refinancing to a fixed-rate mortgage to get an interest rate that won’t fluctuate.
Or, if you know you’ll be moving in a few years, refinancing to an ARM from a longer-term fixed loan might help you save some money because lenders usually offer lower interest rates on those loans.
» MORE: Best lenders for refinancing
What's changed from your last loan closing?
Has your credit score and payment history improved since you got your mortgage? If so, you might qualify for a better interest rate on a refinance, which will help you save more per month and break even sooner.
On the other hand, hitting a rough financial patch (or two) can do a number on your credit, and that affects your ability to qualify for a refinance loan and get a good rate.
If you’ve been late on a credit card payment, bought a new car or taken on student loans, your credit score might be lower than it was when you took out your original mortgage.
Before refinancing, you might want to do some credit repair.
» MORE: How your credit score affects your mortgage rate
That could include waiting to apply for a refinance until after reducing some debt, making sure there are no mistakes in your credit report and allowing your credit history to heal over time with a period of prompt payments.
Or, when you determine how much you pay in credit card and other high-interest debt each month, you may find the money you’d spend on closing costs could be better spent paying down those bills instead of refinancing your home.
Saving money on your mortgage helps you build wealth. If now isn’t the ideal time for you to refinance, keep plugging away on your current mortgage payments and improving your credit so you’ll be ready to strike when the time is right.
This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from September 8-10, 2020 among 1,413 U.S. homeowners ages 18 and older.
This online survey is not a probability sample and therefore no estimate of theoretical sampling error can be calculated.
For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Anna Palagi at [email protected]
Is now a good time to refinance?
Generally, a mortgage refinance is a good idea if it will save you money. Mortgage experts say you should consider this move if you can lower your interest rate by at least 0.75%.
For example: Let’s say you have a 30-year, $300,000 loan with a 4% fixed mortgage rate and a monthly payment of $1,567. Refinancing to a new 30-year loan with a 3.25% interest rate can lower your payment by $134, which adds up to $48,240 over the life of the loan.
And if you’ve paid off some of your principal since taking out the original mortgage, your new loan will be a lower balance. That can further lower your monthly payment and save you more money.
Learn More: How to Get the Best Mortgage Rates
How much does it cost to refinance?
Even if you qualify for a lower interest rate, you’ll need to consider the costs of refinancing your mortgage to determine if it’s worth it.
Closing costs typically amount to 2% to 5% of the principal amount of the loan. So if you borrow $300,000 and closing costs are 2%, then you would owe $6,000 at closing.
Other factors, such as where you live, influence the price tag. Here are some of the common costs that come with refinancing:
|Loan origination fee||0.5% to 1.5% of the loan amount|
|Appraisal fee||$300 to $500|
|Title insurance fee||$1,000|
|Credit report fee||$30 to $50|
|Prepaid interest charges||Depends on your interest rate and when your loan closes|
|Mortgage points||Depends on how many points you pay for (1% of your mortgage loan amount equals 1 point)|
Some lenders may offer you a no-cost refinance, which means you won’t pay closing costs upfront. But they’ll make up for this by either wrapping the closing costs into the mortgage principal or increasing your interest rate. You might still come out ahead, but compare the interest costs on your original loan and the new loan to be sure.
How to know when you’ll break even
To figure out how long it will take to recoup your refinance expenses, divide the amount of your closing costs by the amount you save each month. This is called the “break-even point” of a mortgage refinance.
For instance, it would take about 35 months to break even on $5,000 in closing costs if your monthly payment drops by $143. But if you sell the house before the break even point, you’ll lose money in the deal. If you know you’ll move soon, then refinancing might not be worth it.
How long does it take to refinance?
A mortgage refinance typically takes 30 to 45 days to complete, but it may take longer if your lender is dealing with high loan demand or something else slows down the deal. One way to prevent losing out on a good mortgage rate is to lock in your rate for a given period, around 30 to 60 days.
Refinancing through Credible will streamline the application process so you can save time and potentially get to the closing table faster. Use the form below to get started.
Why should you refinance?
By refinancing, you may be able to lower your monthly mortgage payments, save on interest, get a shorter loan term or take out cash — but you generally can’t do it all at once. You’ll need to figure out your main goals before applying.
To save on interest
If you qualify for a lower interest rate, you can save on interest costs while also lowering your monthly payment. To see if you come out ahead, figure the interest costs on your current loan and the new mortgage.
To pay off your loan sooner
If getting debt ASAP is important to you, then refinancing into a shorter-term loan can help. While your monthly payments will ly climb because you’re paying off debt within a shorter time frame, you could save a lot on interest costs.
Take a look at the original mortgage from the example above. If you refinance from a 30-year loan with a 4% rate into a 15-year mortgage with a 3% rate, you’ll take on a higher monthly payment, but you’ll also pay off your mortgage 14 years sooner. In the process, you save $105,911 in interest compared to your original loan.
To change to a different loan type
Homeowners can also refinance from an adjustable-rate mortgage (ARM) to a fixed-rate loan — or vice versa.
To tap into home equity
Tapping into your home equity through a cash-out refinance is another reason to refinance. This involves getting a new mortgage for more than your current balance and pocketing the difference.
You’ll pay off a larger mortgage balance, but you can put the excess money toward higher-interest debt or home renovations.
If you’re considering a cash-out refinance, be sure to consider as many lenders as possible. Credible makes finding the best deal easy — you can compare multiple lenders and see prequalified rates in as little as three minutes.
Home » All » Mortgages » When to Refinance a Mortgage: Is Now a Good Time?
Is Now a Good Time to Refinance My Mortgage? A Decision-Making Guide
Refinancing your mortgage can be a pretty sweet deal. You can lower your monthly payment, cut down the amount of time you need to pay or even pull out cash.
With rates at historic lows, millions of homeowners have already refinanced their mortgages this year. Currently, roughly another 18 million borrowers could potentially benefit from a new loan, according to real estate data firm Black Knight. But, just taking out a purchase mortgage, refinancing requires time and money. You want to be certain it makes sense for you.
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Here are four questions to determine if you should refinance—and one tempting query you should ignore:
Do ask: What do I want to accomplish?
Refinancing replaces your current mortgage with a new loan that has a new term, a new rate and a new monthly payment. By refinancing, you can lower your monthly payments, get a shorter loan term or take out cash—but you generally can’t do all three. You’ll need to figure out your goals and what tradeoffs you’re willing to make.
*Looking for more room in your monthly budget? You’ll need either the longest possible loan—typically 30-years—or the lowest possible interest rate. Rates tend to be lowest on adjustable-rate mortgages, but you risk seeing a big jump after the initial fixed period, so an ARM only makes sense if you will move in the next few years.
*Is getting debt as soon as possible a priority? Look for a loan with a shorter term than is left on your current mortgage.
(Most lenders offer 15-year loans, but some, such as Quicken Loans, allow borrowers to choose periods as short as eight years.
) Monthly payments on a shorter loan are higher, since you’re dividing the balance over a shorter period, but you’ll own your home outright sooner, your mortgage rate will be lower and you’ll pay less total interest over time.
*Need cash now? With a cash out refinance, you can pull out equity you’ve built in your home. You end up with a larger loan balance, but can put that money toward paying off higher interest debt or making renovations. Lenders generally require a borrower maintain at least 20% equity in the home and will charge a higher interest rate than for a no-cash refi.
Do ask: How much can I lower my rate?
Average rates on a 30-year fixed mortgage have been below 4% since June 2019 and crossed below 3% for the first time this summer. This means that millions of homeowners could save money by refinancing.
Keep in mind that you may be charged a higher rate than lenders are advertising, depending on your credit score and how much equity you currently have in your home.
So go through the pre-approval process with at least three lenders to find out what your real rate may be and to make sure you are getting the best deal.
Freddie Mac has found that borrowers save an average of $1,500 over the life of the loan by getting an additional rate quote and an average of about $3,000 if they get five quotes.
A popular rule of thumb says: If you can reduce your interest rate by full percentage point or more you should refinance. For a 30-year loan with a $400,000 balance, lowering your interest rate from 4% to 3% would reduce your monthly payment by about $220 per month. Though it can make sense to refi for less depending on your needs.
Ads by Money. We may be compensated if you click this ad.AdIs your credit history solid? Refinance your home and reap the benefits.Locking in a lower interest rate means lower payments and more savings. Sound good? Get a free quote by clicking below.Refinance Your Mortgage
Do ask: Can I improve my application?
Whether you are purchasing a home or refinancing, three main inputs determine whether you’ll qualify for a mortgage and what rate you’ll be charged.
They are your credit score, as well as your loan-to-value and debt-to-income ratios.
If your financial picture has deteriorated significantly since you bought your home, either because of a job loss or new debt, it may be difficult to qualify for a new loan at all.
Check your credit score before shopping for a new loan. If your credit score has gone up since you took out your mortgage you will ly qualify for a better rate.
If it is lower or the same, you may want to take some time to try improving your score before applying. Paying down debt and asking for credit line increases are all ways to boost your credit score.
Checking your credit report and reporting any errors can also help. Typically borrowers need around a 740 credit score to qualify for the very best rates.
If you’ve lived in your home for a few years and have paid your mortgage consistently, you’ll have built up equity and need a smaller loan today relative to the value of your home—especially if your home is worth more today than when you bought it.
You can think of your home equity the down payment you made on your purchase mortgage. Having more equity, especially once you exceed the 20% threshold, gives you more options—and a better mortgage rate, because lenders will regard the loan as lower risk.
Keep in mind that a larger portion of your payment goes toward interest in the early years of a loan, this process is called loan amortization.
(If you have an FHA loan, once you reach 20% equity, you may want to refinance to a conventional loan to eliminate mortgage insurance premiums, which typically run between $30 and $70 per month for every $100,000 borrowed. If you have a private loan you can request insurance premiums be dropped once your loan-to-value ratio, or LTV, reaches 80%.)
Increasing your income is unly to directly improve your mortgage rate, since you needed to have a debt to income ratio below about 45% to get a loan in the first place. Earning more, of course, is never a bad thing.
You can use the additional money to pay down other debt, which will help with your credit score, or to more comfortably cover the payments on a shorter loan that will save you money in the long run and help you get debt sooner. If you want to grow your equity and have the means, you can pay more than you’re required monthly.
Just make sure to specify that you want the additional money applied to your principal balance and confirm that your lender will not charge a prepayment penalty.
Do ask: How much does it cost to refinance a mortgage?
Refinancing, of course, is not free. The average closing costs to refinance are about $5,000, according to Freddie Mac. Where you live and the size of your loan, however, make a big difference in how much you’ll pay.
In addition to origination fees—generally around 1% of the loan amount—you will need to pay appraisal, title and credit report fees, among others.
Recently, Freddie Mac announced a new Adverse Market Refinance Fee, which the Mortgage Bankers Association estimates will cost the average homeowner an extra $1,400 starting in December.
Typically people pay these costs upfront. Making how long it will take to recoup your closing costs an important factor in whether it makes sense to refinance at all.
To do the math for yourself, divide your closing costs by how much you would save each month by refinancing.
If it will take you 48 months—4 years—to recoup the costs, but you only expect to stay in the house for three years it probably does not pay to refinance.
Your lender may offer what is called a no-cost refinance. Instead of paying these fees upfront, with a no-cost refi you pay over time, either by adding the balance to your loan principal or with a higher interest rate.
(If you have a loan they cannot sell on the secondary market, a jumbo mortgage, a no-cost refinance may not be an option for you.) A no-cost refi can be a good deal if you plan to sell relatively soon.
However, you may end up paying more over the life of the loan by paying a higher rate or adding principal.
If this is your forever home, one final thing to keep in mind is that by refinancing to a loan term longer than you have left on your current mortgage you will be extending the overall time you’ll be paying for your house and in some cases end up paying more in total interest.
For instance, imagine that a decade ago you took out a $200,000 30-year fixed rate loan with a 4.187% mortgage rate. If you refinanced to the same loan type today with a 3.437% rate, you would save $121 a month. It will take about four years to recoup average closing costs.
But after 20 years the original loan would have been paid off, while you will keep paying interest on the new one for another decade. All told, by spreading mortgage payments over 40 years instead of 30, you would end up paying about $80,000 more in interest than if you stayed in the original loan, despite the lower monthly payment.
A refinance calculator can help you determine if that is the case for you.
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Do not ask: Will mortgage rates keep dropping?
As with stocks, timing the mortgage market is generally not worth the trouble. “The odds are you will never buy a stock at the absolute low or sell it at the absolutely high,” says Patrick Boyaggi, chief executive of digital mortgage brokerage Own Up. “In the same way, the odds you will get the lowest interest rate ever for your particular situation is also low.”
In other words, don’t wait to see what happens with mortgage rates tomorrow, if you can save money or move closer to your financial goals by refinancing today.
More from Money:
Is It a Good Time to Refinance Your Mortgage?
How to Get the Lowest Mortgage Rate: A Step-by-Step Guide
How to Get Preapproved for a Mortgage: A Step-by-Step Guide for Homebuyers
Mortgage rates keep falling to record lows — so is now a good time to refinance?
The coronavirus pandemic has led to a dramatic decline in mortgage rates. But that doesn’t mean now is a good time to refinance for everyone.
Last week, Freddie Mac FMCC, +0.54% reported that mortgage rates hit a new record low for the fourth time this year, with the average rate on a 30-year fixed-rate mortgage dropping to 3.13%.
When rates hit their first record low of the year back in March, it triggered a deluge of refinancing activity just as many lenders were transitioning to remote work environments because of the spread of COVID-19. That led to a massive backlog at some lenders, with some borrowers waiting weeks to close their refinances.
Now, the market has settled down, and lenders have adapted to the coronavirus world.
And the good news for borrowers is that most markets are served by mobile notary services, said Pat Stone, co-founder and chairman of title insurance company Williston Financial Group, and other states allow for entirely virtual mortgage processes. That means in most parts of the country getting a new home loan won’t mean risking your health, as infection rates remain stubbornly high in many areas.
Read more: Home prices continued to rise even as the coronavirus pandemic swept across America, FHFA says
But will refinancing your mortgage risk your financial health? Here’s what homeowners need to consider before closing on a new loan.
Figure out when you’ll break even
As a general rule of thumb, experts say that a refinance will be worthwhile if it will net a homeowner an interest rate between 50 and 75 basis points lower than their current mortgage’s rate. That’s because the reduced interest will compensate for the closing costs associated with the refinance.
But those savings don’t come immediately — it will take a few year before the savings via monthly payments accrue to outweigh the costs.
“If you’re in your forever home, it might make sense to refinance with a half-point rate decrease,” said Holden Lewis, home and mortgage expert at personal-finance website NerdWallet. “But if you plan to sell the home within five years or so, it’s most ly not worth it because you’ll pay more in fees than you would save during that time.”
“ ‘If you’re in your forever home, it might make sense to refinance with a half-point rate decrease.’ ”
— Holden Lewis, home and mortgage expert at personal-finance website NerdWallet
Pay attention to the loan’s term
Homeowners shouldn’t necessarily default to a 30-year loan, despite their popularity.
“Because rates have fallen so much you could probably get into a 15-year loan and maybe maintain or even still lower your monthly payment,” said Tendayi Kapfidze, chief economist at LendingTree TREE, +2.31% . “You’re going to pay off the loan sooner and you’re going to pay less interest.”
Choosing a shorter term has its trade-offs though, mortgage industry experts warn, if locking into such a loan means making larger monthly payments. The standard 30-year mortgage offers flexibility.
“You have the flexibility to pay extra every month when you can afford to, and you can cut back to the minimum required payment during insecure times,” Lewis said.
Don’t be afraid of closing costs
When doing your break-even analysis, don’t shy away from paying closing costs. While paying those costs upfront may seem it’s making the refinance more expensive, in reality it could be saving you money.
“It’s always attractive to say ‘no cost,’ but you might end up paying for it over the life of the loan,” said Brian Koss, executive vice president of Mortgage Network, a Massachusetts-based lender. That’s because those costs don’t go away. Rather, they may be rolled into the loan’s balance, or lead to a higher interest rate.
Along those lines, you can prepay your interest by paying for mortgage points. The upfront cost, again, will be higher if you do this, but will save you thousands in interest.
The tumultuous economy has made it harder to qualify
As millions of Americans lost their jobs or were furloughed because of coronavirus-related business closures, lenders went into damage control mode. Many lenders raised the standards borrowers must meet to qualify for a new loan. This included higher minimum credit scores and lower debt-to-income ratios, among other factors.
The prospect of an imminent economic recovery is far from certain. While the job market has improved in recent weeks, some states that have reopened their economies have seen a surge in coronavirus cases.
“ ‘It’s always attractive to say ‘no cost,’ but you might end up paying for it over the life of the loan.’ ”
— Brian Koss, executive vice president of Mortgage Network
“The V-shaped bounce back was kind of a pipe dream in the first place, and it’s looking less and less ly, notwithstanding the recent strong data that we’ve seen,” Kapfidze said. “I’ve been anticipating that lenders are going to get more and more conservative and restrictive with their lending standards.”
If you were furloughed, laid off or if you’re self-employed, it could be harder to get approval for a refinance. In these cases, borrowers may have luck turning to their current lender for a refinance.
“Your current lender is heavily invested in you,” Kapfidze said. It will cost them money to lose business, so they may be willing to offer homeowners deals on refinancing.
If you received forbearance, you may hit roadblocks
The CARES Act let millions of Americans take advantage of the ability to claim forbearance from their mortgage payments.
But being in a forbearance plan could disqualify a homeowner from certain types of loans. If you skipped payments while in forbearance, you must make at least three current payments after ending the plan to be eligible for a refinance into a loan backed by Fannie Mae FNMA, or Freddie Mac.
Also see:Americans are eyeing homes in the suburbs as pent-up demand hits housing market
But if you were one of the many Americans who requested forbearance but continued making payments, you will be eligible to refinance right away so long as you stay current on your loan.
Finally, don’t try to time the market
Yes, mortgage rates have fallen to a new record low multiple times this year. But there’s no guarantee that trend will continue.
“People are waiting for a rate a half a percent below where we are now relatively — that’s getting greedy,” Koss said.
There’s a significant upside risk to mortgage rates right now. Their recent drops have largely come after the stock and bond markets have responded to negative news about the coronavirus pandemic.
The potential for a second wave remains, and some states are seeing another surge of infections as part of the first wave of the outbreak. But health experts have suggested that a vaccine could come very soon, and researchers have several promising candidates for coronavirus treatments.
If a vaccine or treatment for COVID-19 is announced, that would ly cause markets to rally — and mortgage rates to rise in tandem.
“Don’t try to time the bottom, just pick the rate that makes the most sense,” Koss said.