WTo determine if it is the right time to refinance, homeowners need to weigh the costs of refinancing against the benefits. While it may seem daunting, it doesn’t have to be a difficult task.

The truth is that millions of homeowners can still benefit from mortgage refinancing.

Current mortgage rates hover around 3%, higher than at the start of 2021 but still close to historic lows. At current rates, there are an estimated 11.2 million well-qualified homeowners who could reduce their mortgage interest rate by at least 0.75% if they decided to refinance today, according to mortgage data company Black. Knight.

Together, these owners could save a total of $ 3.1 billion per month, or about $ 279 per owner per month. That’s a potential savings of $ 3,348 per year. About 1.2 million of these homeowners could save up to $ 500 per month, for annual savings of $ 6,000.

These borrowers – as well as those who can lower their interest rate less – will need to decide whether these savings justify the closing costs.

With the potential savings, it’s worth taking the time to consider your options and see if a refi is the right decision. We’ve covered the basics to help you decide.

If your mortgage rate is over 4.12%, now is probably a good time to refinance

Mortgage rates for qualified borrowers have hovered around 3% over the past four months. The current average for a 30-year fixed rate loan is 3.12%.

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

If you have a balance of $ 300,000 on your mortgage and refinance for a new 30-year loan, lowering your interest rate from 3.75% to 3.25% will save you around $ 84 per month. or $ 1,008 per year. If you can 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 don’t need to refinance another 30 year loan. If your finances have improved and you can afford higher monthly payments, you can refinance your 30-year loan to a 15-year fixed rate mortgage, which will allow you to pay off the loan faster and pay less. of interest.

However, taking a look at your monthly savings is only part of the refi equation. You also need to factor in the cost of changing the loan and how long it will take you to recoup those costs, or “breakeven point.”

Just like with a purchase loan, you will have to pay the closing costs of a refinance. These costs may include creation and application fees, appraisal and inspection fees, and title search fees. In total, the closing costs can represent between 3% and 6% of the total amount of the refinanced loan.

You can determine your breakeven 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 you to recoup the cost of refinancing and start saving money. The less time it takes to break even, the more logical it makes to refinance your home loan.

The final piece of the refi puzzle balances your refinancing goals with the change in loan term. For example, if you’ve had a 30-year mortgage for 10 years, refinancing with another 30-year loan means you’ll be paying a 40-year mortgage instead of 30.

If your main reason is to reduce your monthly payments, refinancing with another 30-year mortgage makes sense. However, if your goal is to save on interest and reduce the term of your loan, refinancing a 30-year mortgage to a 15-year mortgage may be the best option, provided you can afford the costs. higher monthly payments. Use a mortgage refinance calculator to get an idea of ​​what might work for you.

Are mortgage refinancing rates still low?

When the COVID-19 pandemic first struck in March 2020, the Federal Reserve crafted monetary policy to help stabilize financial markets and mitigate the economic impact of the virus. Part of that policy was to reduce 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 treasury bills and other financial instruments per month to inject money into the economy and encourage investments and loans.

However, as the economy continues to show signs of improvement, the central bank announced at its November meeting that it would start scaling back its asset purchase program. The Fed has started cutting its treasury bill purchases by $ 10 billion per month and $ 5 billion per month from MBS.

The net effect of these policies was to lower mortgage rates, with the 30-year average rate falling below 3% for the first time in history in July 2020. Rates hit a record high of 2.00%. 65% on January 7 of this year. . Since then, rates have tended to increase but have hovered around 3%. After peaking at 3.14% on October 28, rates fell again and are currently averaging 3.12%.

However, if you are considering refinancing, it may be best to act as soon as possible. Most economists agree that mortgage rates will rise in 2022, with rates ending the year between 3.5% and 4%.

How to know when to refinance your mortgage

Here are some key points you should consider when deciding whether or not to refinance your mortgage:

• Your credit rating. With most mortgage lenders, you will need a credit score of at least 620 to be eligible for mortgage refinance. To get the lowest mortgage rate, you will need a 740. Also keep in mind that if your credit is lower than it was when you took out your current mortgage, you may not qualify. at a rate as advantageous as before.
• Your debt-to-income ratio (DTI). For conventional loans, some lenders will work with a DTI of up to 43%. FHA loans will go a little higher, typically accepting DTIs of 50%. Lower, however, is generally better.
• How long are you staying. When you refinance, you will have to pay the closing costs. If you plan to relocate in the near future, you may not be able to break even.
• How much equity you have in your home. In order to qualify for mortgage refinancing, you generally need at least 20% of the equity in your home.

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

Mortgage refinancing faqs

Are refinancing rates going down?

While current mortgage rates remain low, most mortgage experts predict that rates will rise in the months and years to come. The Federal Reserve is expected to start raising short-term interest rates in 2022. The Fed doesn’t set mortgage rates, but lenders tend to raise the price of loans when the Fed acts.

Why would refinancing be a bad idea?

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

Is it cheaper to refinance with my current lender?

Not necessarily. While it is possible that an established relationship with your current lender could lead to better rates, this is not a guarantee. Your best option for finding the best mortgage rate is to shop around and consider different types of lenders, including banks, mortgage brokers, private lenders, and credit unions.

How To Get The Best Refinance Loan Rates?

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

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