by Maurie Backman | Published on Sept. 25, 2021
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Homeowners have been rushing to refinance. Should you do the same?
Though mortgage rates have been very competitive throughout the month of September, they've largely held steady. In spite of that, refinance activity soared for the week ending Sept. 17.
That week, refinance activity rose 7%, according to the Mortgage Bankers Association. By contrast, applications for a mortgage to purchase a home were only up 2%.
Seeing these numbers may have you wondering whether it pays to refinance your own mortgage. Here are some questions to ask yourself that will help you make the right decision.
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There are different factors refinance lenders look at when deciding whether to approve applicants. You should expect your lender to put a lot of emphasis on your credit score. If that needs work, you may want to hold off on refinancing until you're able to boost your credit score.
Another factor that lenders look at is your debt-to-income ratio, which measures your existing debt relative to your income. If that ratio gets too high, a lender might hesitate to give you a loan for fear that you won't manage to keep up with the payments.
Finally, refinance lenders want proof of a solid income. If you've recently lost your job or have seen your earnings take a hit, you may want to hold off on refinancing until that situation improves.
As a general rule, your goal in refinancing should be to lower the interest rate on your mortgage by about 1% or more. If you already have a low interest rate on your home loan, then it may not make sense to refinance because you won't reap a lot of savings. But if you're able to hit that 1% threshold or at least get pretty close, then it could be worthwhile to get a new home loan.
When you refinance a mortgage, you pay closing costs on your new loan, the same way you pay closing costs on a purchase mortgage. Closing costs typically equal 2% to 5% of your loan amount. So you'll need to make sure you plan to stay in your home long enough to break even from those closing costs and come out ahead financially.
Say you're charged $4,500 in closing costs to refinance. If doing so cuts your monthly mortgage payments by $150, it'll take you 30 months just to break even. If you think you might move within two and a half years, then refinancing won't actually make sense in this situation, even if you are able to slash your loan's interest rate by 1% or more.
Refinancing could be a smart move that saves you money on your mortgage payments. And right now, refinance rates are extremely competitive. But before you rush to refinance, run through these questions to be sure that it makes sense for you. In some cases, you may want to hold off on refinancing or avoid doing it altogether.
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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