Mortgage Refinances Are Up Over 200% From Last Year. Should You Hop on the Bandwagon?

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There's a reason homeowners have been clamoring for new loans.

The summer of 2020 has seen mortgage rates fall to record lows, and while rates for new mortgages are generally lower than refinance rates, the latter have still been favorable. In fact, right now, the average refinance rate for a 30-year fixed loan is a very competitive 3.241%. For a 15-year refinance, it's 2.79%.

It's not surprising, then, to learn that refinance lending is up more than 60% from the first quarter of 2020, and more than 200% from the same time last year, according to Black Knight. But the question is: Is now the right time for you to refinance?

The case for refinancing today

Refinancing your mortgage today makes a lot of sense if you're planning to stay in your current home for a while -- specifically, long enough to recoup the closing costs you'll pay on that loan. Say you're charged $4,500 in closing costs to refinance a mortgage, which lowers your monthly payment by $150. That means it'll be 30 months before you break even and start to actually reap some savings from your refinance. Make sure you don't have any near-term plans to move if you're thinking of getting a new home loan.

Assuming you are planning to stay put, it pays to refinance today for two big reasons. First, current rates are phenomenal. Granted, there's a chance they'll stay low well into 2021, but the concept of "low" is relative. For example, historically speaking, a 30-year refinance at 3.5% is considered low. But right now, borrowers are paying an average of 3.241% nationwide. Even the smallest difference in rates can make a big difference over the life of your lown, so it does pay to get in while rates really seem to have hit rock bottom. Of course, rates could still go lower -- without a crystal ball, it's impossible to tell, but right now, they're extremely favorable.

Another reason to move quickly on your refinance is that starting Dec. 1, borrowers who refinance will be hit with a 0.5% fee. That fee was originally set to begin in September, but it's been delayed three months -- which gives you time to refinance your loan before it kicks in.

The best reason to wait to refinance

Refinancing your mortgage could certainly make sense right now, but you may want to hold off for one big reason: Your credit score is mediocre. The average 3.241% refinance rate noted above won't be yours if you don't have a strong credit score. If that's the case, you're better off spending a couple of months boosting your credit score and then attempting to refinance. That way, you're more likely to get a better rate.

There are a few steps you can take to boost your credit quickly. First, pay off a chunk of outstanding credit card debt. It will lower your credit utilization ratio, which is a key component of your credit score. Next, check your credit reports for errors, and correct those that work against you. You're entitled to a free copy of your credit report every week during the coronavirus pandemic from each of the three reporting bureaus: Experian, Equifax, and TransUnion. Finally, be sure to pay all incoming bills on time, since your payment history is the single most important factor that goes into calculating your score.

Clearly, refinancing is all the rage these days, and for good reason. Going that route could make sense for you -- but only if you're planning to stay in your home for a while and you have solid credit. As a general rule, it doesn't pay to refinance if you can't lower your interest rate by at least 1%, so make sure you get a good enough deal to make the process worth your while.

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