Refinances Are Up Again. Should You Get a New Mortgage?

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KEY POINTS

  • Refinance volume was up 9% last week from the previous week.
  • If you've yet to refinance your mortgage, it could pay to do so -- but only if the circumstances are right.

Here's how to know if a refinance is right for you.

Homeowners have been refinancing in droves since mid-2020, when mortgage rates started falling to record lows. These days, mortgage rates are higher than they were last summer, but they're still very competitive on a historical basis. From an interest-rate perspective, it's a good time to swap an existing home loan for a new one.

Clearly, many homeowners agree. Last week, refinance demand rose 9% from the previous week, reports the Mortgage Bankers Association. And while that uptick may have been fueled by a brief dip in mortgage rates, it may also be the case that some homeowners wanted to get the ball rolling on their refinances before the end of the year.

If you've been thinking about refinancing your mortgage, current interest rates certainly make a compelling case to do so. But you'll also need to make sure your circumstances are such that refinancing makes sense.

How's your credit score?

While today's refinance rates are sitting at attractive levels, your best chance of snagging a great rate is coming in with a high credit score. If your credit score could use some work, it might pay to hold off on refinancing until you're able to boost it.

With that said, you don't need perfect credit by any means to score an affordable refinance rate. Once your credit score reaches the mid- to upper-700s, it really doesn't matter exactly what that number looks like. If your credit score recently fell from an 802 to a 795 because you applied for a new credit card, that's not really a reason to hold off on refinancing -- especially with mortgage rates being so attractive right now.

On the other hand, if your score recently fell from a 720 to a 630 because you were late paying a bill or two, then that's a scenario where it could pay to hold off on refinancing. A score of 630 could result in a higher interest rate than what you'd like to lock in.

Do you have any near-term plans to move?

When you refinance a mortgage, you're charged closing costs to finalize that loan. Those fees typically amount to 2% to 5% of the sum you're borrowing. You'll need to make sure you intend to stay in your home long enough to recoup those costs and actually reap savings.

Imagine you're charged $5,000 to refinance your current mortgage. Doing so might lower your monthly payments by $200, but it will take you 25 months of lower payments to make up for your closing costs. If you think you might move in two years, refinancing won't make sense.

While refinance rates are sitting at affordable levels right now, the good news is that they're likely to stay that way for a while. If you haven't yet looked into refinancing, don't sweat it. With the holidays coming up, you may not have time to submit applications and shop around with different refinance lenders. But if you decide that refinancing is right for you, there's a good chance mortgage rates will still be favorable at the start of 2022.

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