by Maurie Backman | Feb. 4, 2021
Refinance activity is soaring. Should you apply for a new home loan?
Refinancing a mortgage is a great way to lower your monthly housing costs and save a ton of interest over the course of your home loan. And these days, borrowers are getting that message loud and clear.
Mortgage refinance applications jumped 11% last week compared to the week prior, reports the Mortgage Bankers Association (MBA). Demand for refinances was 59% higher than it was a year before, and the MBA's refinance index hit its highest level since March 2020.
Of course, we can thank low refinance rates. Refinance rates climbed a little at the start of 2021 but have been slowly but surely creeping back down. And homeowners are wisely taking advantage of them.
If you're thinking of refinancing your mortgage, now's certainly a good time to apply. But ask yourself these questions before you do.
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Refinancing generally makes sense when you can lower the interest rate on your mortgage by around 1% or more. Refinancing may not be so useful if your rate is already pretty low. Sure, you might save money on a monthly basis. But remember, when you refinance a mortgage, you're charged closing costs to finalize that loan. Those fees could be substantial -- they normally total 2% to 5% of your mortgage value -- and they're not worth paying for minimal monthly savings.
Those closing costs we just talked about? You'll only start to reap savings from your mortgage refinance once you break even. So you'll need to stay in your home long enough to make that new home loan worth it. Imagine you're looking to move in about two years but decide to refinance in the meantime. If you're charged $5,000 in closing costs in exchange for a monthly payment that drops by $250, it will take you 20 months just to break even before you can start enjoying savings. In that situation, refinancing generally isn't worth it. On the other hand, if you have no plans to move for a good five years, refinancing does pay off.
The general point of refinancing is to save money by snagging a much lower interest rate on your mortgage. But you won't get a low rate if you're not a great loan candidate. Before you apply to refinance, you'll want to make sure that:
If you can't check these items off, you might consider waiting to refinance until your circumstances change.
It's easy to see why so many borrowers have rushed to refinance. You, too, might benefit from a new home loan. If that's the case, shop around with multiple refinance lenders and see what offers they come back with. You never know when one lender might have a more competitive interest rate or lower closing costs than another, so spend a couple of weeks doing your research before making a decision.
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.
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