2 Million Borrowers Could Save Big Time Now That Refinance Rates Have Dropped
There's still savings to be reaped by refinancing. Should you get a new home loan?
At the start of the year, mortgage refinance rates were sitting near record lows. But in the course of 2021, rates have come up, so there's been less refinance activity over the past couple of weeks.
But recently, refinance rates have crept down, and that means many homeowners may be missing out on a major opportunity to lower their monthly mortgage payments. In fact, it's estimated that 2 million borrowers could save an average of almost $300 a month by refinancing their mortgages at today's rates, according to Black Knight.
If you're still carrying your original mortgage, or you haven't refinanced in several years, it could pay to swap your current home loan for a new one with better terms. Here's how to know if refinancing is right for you.
1. Will you lower your loan's interest rate by about 1% or more?
Generally speaking, it pays to refinance when you can drop the interest rate on your home loan by roughly 1% at a minimum. So it's worth taking a look at today's refinance rates to see what sort of savings you may be in line for. Keep in mind, though, that to qualify for a good rate on a refinance, you'll need a strong credit score (ideally, one in the mid-700s or higher) and a low debt-to-income ratio.
2. Is there a good reason to refinance if you can't lower your interest rate by 1% or more?
For many borrowers, the goal of refinancing is to save money on their monthly mortgage payments. But you may have a different reason to refinance. Say you owe a lot of money on your credit cards, but you also have a lot of equity in your home, which is the portion you own outright. With a cash-out refinance, you can borrow more than your existing loan balance and use the remainder for any purpose, including paying off debt.
Say you owe $150,000 on your home loan. And you have $40,000 in credit card debt with an average interest rate of 20%. Now, let's assume you're eligible for a $190,000 refinance at 3.5% interest. It would make more financial sense to pay off $40,000 in credit card debt at 3.5% instead of 20%. In this scenario, a cash-out refinance would give you $40,000 to use for that purpose, so even if you don't lower your loan's interest rate all that much, it could still be worth it.
3. Will you stay in your home long enough to recoup your closing costs?
When you refinance a mortgage, you pay a series of fees to finalize that loan known as closing costs. You'll need to make sure you plan to stay in your home long enough to make back those fees and enjoy monthly savings afterward.
Say it costs $6,000 to refinance and you save yourself $300 a month in the process. You won't actually break even until the 20-month mark, so in that case, you'd want to make sure you're not planning to move before then.
Even if refinance rates do creep up a bit in the next few weeks, a lot of homeowners could still save a fair amount of money by swapping their existing mortgages for new ones. If you've yet to refinance, it pays to consider it, because while rates are still quite competitive right now, we don't know how they'll trend in the coming weeks. And the more rates climb, the less you'll stand to gain by refinancing.
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