Should I refinance? How to know if it’s the right time

Refinancing while mortgage rates are at historic lows could help you secure a lower rate and reduce the amount of interest you pay over the life of your loan. Here’s what to keep in mind as you consider refinancing. (iStock)

With today’s low mortgage rates, you may be wondering if now is the right time to refinance your mortgage. 

Through the pandemic, the Federal Reserve has kept interest rates low to bolster the economy and encourage growth. But Freddie Mac and Fannie Mae both predict that mortgage interest rates will increase as much as 0.5% for a 30-year fixed-rate mortgage in 2021.

An improving economy and inflation could nudge along an increase in rates — albeit marginally. 

But even a small increase could result in substantially higher total interest costs if you refinance hundreds of thousands of dollars. Let’s take a closer look at what to consider if you’re thinking about refinancing your mortgage.

How does refinancing work?

Refinancing a mortgage is similar to the process you went through to get your current loan. But instead of taking out a loan to purchase a home, you’re applying for a new loan to pay off and replace your existing mortgage. 

The new mortgage will have a new interest rate, monthly payment, and repayment schedule. 

Completing the home refinancing process typically takes 30 to 45 days. But yours could take more or less time, depending on many factors. 

SHOULD I REFINANCE MY HOME RIGHT NOW?

What is necessary to refinance a home?

While refinancing is straightforward, there are several things to know before you refinance.

Here are some of the main pieces of the refinance process:

  • Home appraisal: Lenders will likely require a home appraisal to determine your home market value and available equity. Homeowners usually pay the appraisal costs and may need to perform repairs to qualify for financing.
  • Closing costs: Homeowners typically pay closing costs between 2% and 5% of the mortgage balance including origination fees, credit report costs, title costs, and discount points.
  • Attorney fees: While you won’t need to hire a real estate agent, you may need to use a closing attorney depending on your state and personal situation.
  • Credit check: Lenders perform a soft credit check to see if you prequalify for a mortgage loan refinance and a hard inquiry to provide a firm credit offer. You’ll need a minimum 620 FICO score for a conventional loan or a 580 FICO score for a federal streamline refinance FHA loan.

You’ll need to determine if the potential refinance savings exceed the initial fees and the lifetime interest costs of your existing home loan. If so, refinancing can be worth the effort.

Credible can help you learn about your refinancing options and compare rates from multiple lenders.

Why do people refinance mortgages?

You may consider refinancing for several reasons:

  • To get a lower interest rate: Interest rates are significantly lower now than they were just a few years ago. So refinancing to a lower rate could mean paying less in interest over the life of your new mortgage.
  • To get a shorter loan term: Shortening your loan term can have multiple benefits. Switching to a 15-year term could mean you qualify for lower rates than a 30-year mortgage. While your monthly mortgage payments may be higher, you’ll be able to pay off your home sooner.
  • Convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage: While ARMs start off with a low rate, when the initial term ends and the rate resets, your loan costs could increase significantly. Refinancing into a fixed-rate mortgage could help you avoid a big spike in your interest costs.
  • To tap equity or consolidate debt: People tap their home equity for a number of reasons, including funding home improvements or repairs, and consolidating debt. Proceed with caution, however, if you’re thinking of refinancing a mortgage to pay off credit card debt. While you’ll likely get a lower interest rate, the lender can foreclose on your home if you cannot repay the balance.

If you’re looking to secure a lower interest rate and better repayment terms, refinancing can be worth it. 

What are some pros and cons of refinancing?

If you’re still unsure whether it’s the right time to refinance, considering the positives and negatives can help answer your mortgage refinance questions.

Pros of refinancing your home

  • Lower interest rates: You may be able to qualify for a lower interest rate, which could reduce the lifetime interest costs of your mortgage.
  • Potentially lower monthly payments: Refinancing can let you get a lower monthly payment by renegotiating the payment term or by getting a better interest rate.
  • Avoid rising interest rates: Refinancing an ARM to a fixed rate can secure today’s low rates and the same monthly payment for the life of the loan. With an ARM, if future rates rise, the monthly payment can increase when the adjustable rate resets.
  • Use home equity to improve home value: Some homeowners may qualify for a cash-out refinance that allows them to spend their current equity. Using the equity for home improvements to increase the property value can help the home sell for more.

Cons of refinancing your home

  • Rates may go lower: Refinancing now lets you get one of today’s best rates, but it’s always possible mortgage rates can go lower instead of higher. Lower rates can mean more potential savings.
  • Closing costs: One-time fees are between 2% and 5% of the refinance amount and offset some of the potential loan benefits.
  • Potential higher monthly payment: The tradeoff for a lower interest rate or a shorter loan term is a potentially higher monthly payment. Despite the higher cost, more of the payment applies to the principal instead of accrued interest.
  • Home equity reduction: A cash-out refi can be an affordable way to access cash to improve your finances. However, you reduce your home’s equity. This can make it harder to qualify for future financing and increases your refinanced mortgage balance.

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How much does it cost to refinance a house?

Refinancing your mortgage can help you save money long-term and may be a good personal finance decision. But several factors affect the cost of refinancing.

  • Size of your loan: The more you borrow, the more money you’ll have to pay interest on — and the higher your closing costs are likely to be.
  • Your lender: Each lender may charge different fees and have minimum qualifications. Refinancing with the same lender that holds your current mortgage can minimize stress, but take time to compare rates.
  • Where you live: Interest rates can vary by real estate market. The local economy and current foreclosure rates affect the rates that mortgage lenders charge.
  • Your credit score: Higher credit scores generally qualify for the best rates. It’s possible to refinance a home with bad credit, but you might get a higher interest rate.
  • Current home equity: If you don’t have at least 20% home equity, your lender may require you to have private mortgage insurance.
  • Loan term: Shorter repayment lengths can have lower APRs than longer repayment periods. However, the monthly payment can be higher than your original mortgage because you’re paying the interest over a shorter time period.
  • Type of mortgage loan: Interest rates also depend on whether you choose a fixed rate or an adjustable-rate mortgage. Variable mortgage rates can adjust once a year after the fixed term ends.
  • Prepayment penalty: If your current mortgage lender charges a prepayment penalty, this fee will increase the cost of refinancing.

 Visiting Credible to compare rates and lenders can help you find the best loan terms.

Common refinance fees

Here are some of the standard charges that homeowners pay to get a mortgage refi:

  • Origination fee: Lenders charge several fees to cover the application, underwriting, and processing costs for loan origination. You might be able to reduce these costs, but you should expect to pay between 0.5% and 1.5% of the loan amount.
  • Home appraisal fee: A typical home appraisal costs between $300 and $500. The exact cost depends on where you live and your home size.
  • Title search: The lender will most likely conduct a title search to verify you own the home you wish to refinance. Generally, this fee is between $75 and $250 for most homes.
  • Title insurance: Your lender may also require you to purchase title insurance for the new loan. This coverage can cost up to $1,000 and protects you from recording errors.
  • Recording fee: Your local government will record the change of mortgage lenders in the public records. This fee varies by municipality.
  • Credit check: Banks perform a hard credit inquiry from at least one credit bureau to view your credit history and credit score. This service can cost between $30 and $50.
  • Private mortgage insurance (PMI): Conventional loans require a minimum of 20% equity to waive private mortgage insurance on the home refinance. Homeowners can pay to meet the 20% minimum if the current equity is insufficient.
  • Adverse market fee: Freddie Mac and Fannie Mae federal loans have a 0.50% adverse market fee during the pandemic to purchase loans and refinance loans. In most cases, lenders include this fee in the ongoing APR instead of an upfront charge.

So should I refinance my home right now?

Mortgage rates are currently near their lowest levels ever, but the largest lenders predict interest rates will rise in 2021. 

It can make sense to consider mortgage refinancing for these purposes:

  • Your refinance rate is lower than your current rate.
  • Your credit score has improved and you may qualify for a better rate.
  • You want to convert an adjustable-rate mortgage to a fixed-rate mortgage.
  • The monthly savings are more than the refinancing closing costs.
  • You can qualify for a more affordable monthly payment.

Refinancing today can give you peace of mind that you’re getting an ultra-low rate. Rates are more likely to rise as they’re already at historic lows. An improving economy can cause rates to rise as housing demand increases.

While this may be one of the best times to refinance your home, refinancing isn’t a great fit for everyone. 

Avoid refinancing your home for these reasons:

  • Have consumer debt: Home loans already have some of the lowest interest rates. Keeping your current loan and focusing on paying off high-interest debt can save more than the mortgage refinance closing costs and interest savings from a lower rate.
  • High closing costs: The potential home refi savings may not be as high as you think because of the closing costs. Defer refinancing if you cannot afford the closing costs or a no-cost refinance doesn’t work for you.
  • Selling your home soon: Going through the process and expense of a refinance may not be worth the effort if you plan on selling your home soon. Many homeowners can quickly find a buyer with a competitive asking price in today’s current seller’s market.

If you’ve decided it’s the right time to refinance, spend a few minutes comparing lenders and rates at Credible. You can speak with a mortgage expert to review your options. 

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