by Maurie Backman | April 20, 2021
The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
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.
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.
This is one of the top lenders we've used personally to secure big savings. No commissions, no origination fee, low rates. Get a loan estimate instantly and $150 off closing costs.
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.
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.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.