Refinances Push Mortgage Applications Up 3.8% in Late October

A lot of borrowers are refinancing mortgages. Should you?

In the last week of October, mortgage applications rose 3.8% from the week before, according to the Mortgage Bankers Association. Much of that boils down to refinances. In fact, refinances comprised almost 69% of all mortgage applications during that time.

A big part of the reason so many borrowers sought to refinance in late October could be that beginning Dec. 1, there will be a new 0.5% fee tacked onto refinanced mortgages. Since it can easily take 30 days (sometimes more) to close on a mortgage refinance, it makes sense that borrowers sought to beat the fee and get their applications in.

But the question is: Should you get in on the refinance action?

Why it pays to refinance today

At this point, many borrowers who apply to refinance won't close their loans in time to avoid the upcoming fee. Even so, it could still pay to refinance.

Refinance rates aren't as low as the rates available for new purchase mortgages, but they're still extremely competitive. And if you're not planning to sell your home in the near term, then moving forward with a refinance could make a lot of sense, as it may allow you to slash your monthly payment.

Of course, refinancing really only pays if you snag a low enough rate on your mortgage. Here are a couple of steps you can take to make that more likely:

1. Boost your credit score

Today's top mortgage refinance rates will likely be reserved for borrowers with top credit scores -- those in the mid-700s or higher. If your credit isn't great, there are a couple of ways you may be able to boost it fairly quickly. Try paying off a credit card balance, or at least paying a portion of it down, as that could improve your credit utilization ratio. Or see if there are any errors on your credit report that you could correct, for example, a delinquent debt that you never actually racked up.

2. Lower your existing debt

Mortgage lenders take your debt-to-income ratio into account when determining what refinance rate to offer you. The lower that ratio, the better, so if you're able to knock out some existing debt, do so. Your best bet is to start by paying off a credit card balance, but even getting rid of healthier debt like a personal loan can help.

What if you can't score a knockout rate on a refinance? Well, at that point, you'll need to weigh your savings against the closing costs you'll pay.

Imagine you're only able to lower the interest rate on your mortgage slightly so you save $50 a month. While that's certainly a nice chunk of money you won't have to pay your lender, if you're also charged $5,000 in closing costs, it will take you 100 months just to break even -- and that may not be worth it. On the other hand, if you're able to lower your monthly payments by $100 apiece, your breakeven period shrinks to 50 months. Once you apply to refinance and get some offers, you can use this mortgage calculator to see how much refinancing might save you.

There are still savings to be had

The fact that a lot of homeowners rushed to refinance in late October isn't surprising. If you missed that boat, worry not. While it may be too late to avoid the 0.5% that will soon take effect, you can still reap major savings by swapping your existing mortgage for a new one with a lower interest rate.