Refinances Jump as Rates Reach Lowest Level in a Month

With interest rates dipping down, more people have jumped on the refinance bandwagon. Should you?

Though refinance rates have been competitive since the start of 2021, they haven't yet dropped back down to the historic lows they reached over the summer of 2020. But last week, refinance applications rose 6%, according to the Mortgage Bankers Association, and the reason likely boils down to the fact that refinance rates crept down to their lowest level in a month.

If you haven't refinanced your mortgage, now could be a good time to get moving. Here's how to know if a refinance is right for you.

Can you lower your interest rate by roughly 1%?

As a general rule, refinancing a mortgage makes sense when you can lower your loan's interest rate by around 1%. As of this writing, the average interest rate for a 30-year refinance is 3.259% on a national level. Depending on where you live, the average rate may be higher or lower. But you can use that average as a starting point and compare it to what you're currently paying on your home loan.

Is your credit score solid?

To qualify for the best mortgage refinance rate available, you'll need a strong credit score -- ideally, one in the mid-700s or higher. And if your credit score is much lower, you may not get a great rate on a refinance at all. Take a look at yours, and if you're not so happy with it, see if you can boost your score by paying off some existing debt or correcting errors that might exist on your credit report.

Are you planning to move anytime soon?

When you refinance a mortgage, you're required to pay closing costs to finalize that loan, just as you'd pay those fees for a regular purchase mortgage. You'll need to make sure you plan to stay in your home long enough to recoup those fees and come out ahead financially. If you'll spend $4,000 in closing costs on a refinance and doing so saves you $200 a month, it means you have a 20-month break-even period. If you think you'll move within two years, then refinancing probably isn't worth it.

Do you have debt to pay off or home projects to finance?

Many people refinance by swapping their existing home loan for a new one with the same balance. But there's another option you can look at -- a cash-out refinance. This lets you borrow more than your existing mortgage balance and use the remaining cash for another purpose.

If you have a costly credit card balance hanging over your head, you could take cash out of your home, pay off your card, and repay your new home loan at a lower interest rate. Similarly, rather than take out a renovation loan with a higher interest rate attached to it, you can do a cash-out refinance and borrow more affordably for home improvements.

There's a good chance mortgage refinance rates will stay competitive for the rest of the year, so you don't necessarily have to rush to refinance tomorrow. But if you are thinking of going this route, start working through the questions above to help guide your decision.