More Homeowners Are Refinancing This Summer. Here's Why You Should Do So Quickly

If you wait too long, you might miss your prime window.

When interest rates started plunging to record lows back in mid-2020, homeowners across the country rushed to refinance their mortgages. But mortgage rates have climbed substantially since the start of 2022. And at this point, it's harder to make the case to refinance -- especially since so many borrowers jumped on that opportunity somewhat recently.

But while refinance volume has been generally sluggish this year, it did rise by 4% for the week ending July 6. And if you've been thinking of refinancing your mortgage, now may be a good time to get moving.

If you want to refinance, don't wait

Although mortgage rates are higher these days than they were a year ago, they've dipped modestly over the past few weeks. So while the days of bargain borrowing are over, if you act quickly, you might still manage to snag a decent interest rate on a refinance.

But we don't know if mortgage rates will start rising sharply again during the latter part of the summer or fall. So if you've been on the fence about refinancing, you really shouldn't delay.

Is refinancing a smart move for you?

Refinancing could end up saving you money if the rate on your existing mortgage is higher than the rate you might snag today. As a general rule, though, you should aim to lower the rate on your mortgage by about 1% in the course of refinancing. If you can't knock that much off of your rate, then you may not want to subject yourself to the hefty closing costs refinance lenders tend to charge.

And speaking of closing costs, you'll need to make sure you intend to stay in your home long enough to come out ahead financially after paying them. Closing costs on a mortgage refinance can amount to 2% to 5% of your loan amount. So, let's say you have a $300,000 mortgage to refinance and your lender charges 3% in closing costs. That's $9,000 you have to pay upfront, which isn't a small fee.

Now, let's say that in refinancing your mortgage, you manage to lower your monthly payments by $300. It will take you 30 months, or 2.5 years, to break even after paying those closing costs. If you're planning to stay in your home for a good four or five years, then refinancing makes financial sense. But if you might move in two years, then it actually won't pay to refinance because you could end up losing money when you consider the closing costs involved.

How to get a great deal on a refinance

If you're looking to refinance your mortgage, it pays to shop around with different lenders to see what rates they have available, as well as what closing costs they charge. You may want to start with your current lender, as that relationship could work to your advantage. But see what offers other lenders are willing to make you, too.

You should also know that the higher your credit score, the more likely you'll be to snag a competitive refinance rate. If your credit score needs work and you want to refinance in the next few weeks, you may not have much time to boost it. But at the very least, see if a credit report error is what's bringing your score down, because that's something you may be able to address and correct more quickly.