With average rates for a 30-year fixed-interest mortgage being below 4% for all of 2016 and generally hovering in that range for the past few years, people with higher-rate loans have felt little urgency to refinance.
Current mortgage rates have hovered around 3.65%, near historic lows, but there is no guarantee that that they'll stay there. Interest rate increases by the Federal Reserve could push rates higher, as could uncertainty related to our next president. It's easy for people who have only purchased a home recently, during this period of low rates, but the historical average for a 30-year fixed interest mortgage is slightly higher than 8%, and at times it has gone much higher than that.
If you have a mortgage at a rate above 4%, it's worth at least looking at the numbers to consider refinancing before rates rise. If you're paying even more than that, it's almost certainly worth your while to pursue a refinance, because you could not only save on your monthly payments, but you will also pay less interest over the life of the loan.
What do you need to refinance?
Before considering refinancing, it's important to remember that you will need all of the same things you did when you first got a loan. That means you will want to make sure you have two years' worth of tax forms, two months of bank statements, your most recent pay stubs, and documentation on any major recent financial transactions. You will also want to make sure your credit score is in tip-top condition (this article can help), because it will affect whether you can get the best rate.
In addition, you will want to make sure you have enough equity to refinance without having the new loan trigger the need for personal mortgage insurance (PMI). To avoid PMI, which you pay for to protect the lender, not yourself, you need to have at least 20% equity. If you're already paying it, then having PMI on a new loan doesn't change your equation, but if you're not, it's important to make sure the value of your home hasn't decreased enough to lower your equity percentage below 20%.
You can get a rough idea of your home's value by looking at the prices comparable homes have sold for in your neighborhood. A traditional refinance will require an appraisal that will set the ultimate value of your house, but even a cursory search of local transactions should give you an idea if prices have gone up or down.
When should you refinance?
The decision whether to refinance comes down to a mix of math and patience. Lowering your interest rate will cut your monthly payment, but it will come with up-front charges in the form of closing costs. The decision whether to pursue the refinance comes down to how much you will save each month and how long it will take you to recoup the closing costs.
Closing costs can vary greatly, but a recent national survey by Bankrate showed that for a $200,000 mortgage to buy a single-family home with a 20% down payment in a prominent city, the average amount buyers paid was $2,218. Those numbers can be much higher or somewhat lower, but for the purpose of explanation, that's a viable number to use.
If you currently have a $200,000 mortgage at 4.5%, your monthly principal and interest payment comes to $1,013.37. If you can refinance at 3.75%, you can cut that payment to $926.23, a monthly savings of $87.14. If you paid $2,218 in closing costs, it would take about 25 1/2 months before you recoup that money.
Had your original mortgage been at 5%, the monthly savings increases to $147.41 if you can refinance at 3.75%. That brings the repayment time down to just over 15 months.
Should you refinance?
The numbers will vary for each case, but the decision to refinance comes down to whether you're willing to front the closing cost money, and then stay in your house long enough to realize the savings. If you expect to move within a year or two, then it's probably not worth the hassle or the expense. But if you plan to stay in your home for the long run and can cut your rate by 0.75% or more, it makes sense to at least see what offers you can get.