by Maurie Backman | Feb. 15, 2021
Homeowners are clamoring to refinance. Should you do the same?
Though mortgage refinance rates have stayed competitive in 2021, they've recently begun to creep upward, which may have some existing borrowers spooked. That could explain why mortgage refinance applications recently climbed 20%, according to the Mortgage Bankers Association. This activity comes in spite of a recently-implemented 0.5% refinance fee for loans signed on Dec. 1, 2020 or later.
If you've been thinking about refinancing your mortgage, you may want to jump on the bandwagon before rates climb even more. But is now a good time for you to refinance? Ask yourself these questions to find out.
Today's mortgage refinance rates are still extremely competitive, despite a recent uptick. But unless you're able to lower your mortgage interest rate by around 1% or more, refinancing may not make sense due to the costs involved.
As of this writing, the average refinance rate for a 30-year mortgage is 2.91%. If you're currently paying 4.5% on your mortgage, then refinancing could lower your monthly payments substantially and save you a lot of money on interest. But if you're currently paying 3.5%, refinancing may not make so much sense.
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When you refinance a mortgage, there are closing costs you'll pay to finalize your loan (just as there are closing costs with a purchase mortgage). Those generally amount to 2% to 5% of your loan amount, and they'll unfortunately eat into your savings for a period of time. In fact, you won't really start to save money with a refinance until you've broken even on your closing costs. So to that end, you'll need to make sure you plan to stay in your home long enough to make refinancing worthwhile.
Say it costs you $6,000 to refinance, and in doing so, you lower your monthly loan payments by $200. That means you're looking at 30 months to break even, and then, on your 31st month, you'll start to enjoy savings -- and you'll continue doing so from that point forward. If you're certain you won't be moving for at least five years, then refinancing makes sense. But if you think you might move within two years, you're better off not refinancing.
Being an existing homeowner doesn't automatically make you a trustworthy borrower. When you apply for a mortgage refinance, you'll need to go through the same steps you did when you first sought out a loan to buy your home. Specifically, you'll need to show mortgage lenders that you have a solid credit score, a reasonable amount of existing debt, and a steady source of income that's robust enough to cover your ongoing mortgage payments.
Before you apply to refinance, make sure you can check off all of those boxes. If you can't -- say, you recently took out a huge loan or you fell behind on bills last year and your credit score took a hit -- then it pays to wait to refinance. Even if you are approved for a refinance, you probably won't get a great deal on your interest rate if you're not a strong candidate.
Though there are plenty of good reasons to refinance today, it's not necessarily the best decision. Think about your personal circumstances before you start applying for a new home loan. And remember, while refinance rates may climb a bit this year, they're likely to remain extremely competitive. So don't assume you'll lose out in a big way if refinancing later in the year makes more sense for you.
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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