Is it the right time to refinance your mortgage?

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With rising mortgage rates, the benefits of refinancing have diminished or disappeared for most homeowners. Even so, there are still millions of borrowers who could save a lot of money with a mortgage refinance.

Current mortgage rates stand at 3.92%, the highest average since May 2019. At that rate, 3.8 million qualified homeowners could reduce their mortgage rate by at least 0.75 percentage points, according to mortgage data provider Black Knight.

Refinancing will generally pay off if you can lower your rate by at least 0.75 percentage points (eg from 4.75% to 4% or less). With a much lower rate reduction, the closing costs will likely make the savings miniscule or non-existent.

Mortgage rates have risen nearly one percentage point since the start of the year. As a result, Black Knight estimates around 7 million fewer homeowners are in a good position to refinance than they were at the end of December. If rates rise further – as expected – more people could lose the incentive to refinance.

That means if you’re one of the 3.8 million who could cut your rate, it makes sense to act quickly.

Qualified homeowners could save a total of $1 billion per month, reducing their payments by an average of $284 per month or $3,408 per year. About 750,000 of those homeowners could save at least $400 a month, and half a million could save $500 a month or more.

Because the potential savings are significant, you should at least find out if a refinance makes sense now. The following steps will help you make the right decision based on your current financial situation.


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If your mortgage rate is above 4.92%, it’s probably a good time to refinance

The current average for a 30-year fixed rate loan is 3.92%. One of the indications that a refinance 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 are refinancing a new 30-year loan, reducing your interest rate from 3.75% to 3.25% will save you about $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 have to refinance into another 30 year loan. If your finances have improved and you can afford higher monthly payments, you can refinance your 30-year mortgage into a 15-year fixed rate mortgage, which will allow you to pay off the loan faster and pay less. of interests.

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

Just like with a purchase loan, you will have to pay closing costs for a refinance. These costs may include origination and application fees, appraisal and inspection fees, and title search fees. In total, closing costs can represent between 3% and 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 will save each month. The result is the number of months it will take you to recover the cost of refinancing and start saving money. The less time it takes to break even, the more sense it makes to refinance your home loan.

The final piece of the refi puzzle is balancing your refinance goals with the change in loan term. For example, if you are 10 years from now on a 30 year mortgage, refinancing into another 30 year loan means you will be paying a mortgage for 40 years instead of 30.

If your main reason is to lower your monthly payment, refinancing into 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, as long as you can afford the monthly payments. higher. Use a mortgage refinance calculator to get an idea of ​​what might work for you.

Are mortgage refinance rates still low?

When the COVID-19 pandemic first hit in March 2020, the Federal Reserve designed monetary policy to help stabilize financial markets and mitigate the economic impact of the virus. That included cutting the federal funds rate — the interest rate banks charge themselves for short-term loans — to near zero. The Fed has also pledged to buy $40 billion in mortgage-backed securities and $80 billion in Treasuries and other financial instruments per month.

However, with employment improving but inflation rising, the central bank began to reverse its restrictive monetary policy at the end of 2021. The Fed reduced its purchases of Treasury bills by 10 billion dollars per month and MBS of $5 billion per month. In March, Fed policymakers are expected to announce that they will begin raising the federal funds rate.

The net effect of these pandemic-era policies has been to drive down mortgage rates, with the 30-year average rate dropping below 3% for the first time in history in July 2020. Rates hit a record low of 2.65% on January 7. , 2021. For most of the past year, rates have hovered around 3%. Since the start of 2022, however, rates have jumped considerably and currently average 3.92%.

Still, if you’re considering refinancing, it may be best to act as soon as possible. Most economists agree that mortgage rates will continue to rise, with rates ending the year hovering between 3.5% and 4%.


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How to know when to refinance your mortgage

Here are some key points you should 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 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 be able to. not benefit from a rate as advantageous as before.
  • Your debt to income ratio (DTI). For conventional loans, some lenders will work with a DTI as high as 43%. FHA loans will go a little higher, typically accepting 50% DTIs. Lower, however, is usually better.
  • How long do you stay. When you refinance, you will have to pay closing costs. If you plan to move in the near future, you may not break even.
  • How much equity you have in your home. In order to qualify for a mortgage refinance, you generally need at least 20% equity in your home.

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


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Mortgage Refinance FAQs

Are refinancing rates falling?

Although current mortgage rates remain low, most mortgage experts expect rates to continue to climb 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 to borrow money when the Fed acts.

Why would refinancing be a bad idea?

Refinancing is a bad idea if it doesn’t represent some sort of gain, whether in the form of lower monthly payments or interest savings by reducing the term of your loan. If the interest rate offered 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 break even 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’s possible that an established relationship with your current lender could lead to better rates, it’s 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 can I get the best refinance loan rates?

Try to go through the mortgage pre-approval process with at least three lenders to find out your real rate and ensure 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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