Should You Join the 14 Million Homeowners Who Have Refinanced During the Pandemic?

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  • Millions of Americans have taken advantage of low mortgage rates and refinanced since the start of the pandemic.
  • Here's how to know if you should follow in their footsteps.

It may be time to swap your existing mortgage for a new one.

Refinancing a mortgage could result in major savings. During the pandemic, homeowners were especially motivated to swap their existing home loans for new ones. That's because refinance rates have been sitting at competitive levels since last year, allowing lots of mortgage borrowers to reap savings. In fact, CNBC reports that more than 14 million U.S. homeowners have refinanced their mortgages during the pandemic.

If you've yet to refinance, you may be wondering if it's a smart move for you. Ask yourself these questions to find out.

1. Do I have a good credit score?

The higher your credit score, the more likely you'll be to snag a low interest rate on your refinance. That low rate could translate to thousands of dollars in savings.

Generally speaking, you'll qualify for the best rates available if your credit score is in the mid-to upper-700s or higher. If your score is in the upper 600s or lower 700s, you might still receive a decent interest rate on a refinance, but if you can work on boosting your credit score a bit, you might fare even better.

Now, if your credit score isn't in the best of shape, you may want to hold off on refinancing and work on raising your score instead. It doesn't pay to refinance if you won't end up lowering the interest rate on your mortgage all that much.

2. Do I have a low interest rate already?

When you refinance a mortgage, you're charged a series of fees known as closing costs to finalize your new loan. You'll want to make sure you'll really be able to reap a nice amount of savings in the course of your refinance, even when you consider the fees. If your mortgage has a pretty low interest rate already, refinancing may not make sense.

As of this writing, the average refinance rate for a 30-year loan is 3.320%. If you're currently paying 3.5% interest on your mortgage, you probably won't want to refinance.

In fact, as a general rule, your goal should be to shave about 1% off of your current loan's interest rate in the course of a refinance. If you're nowhere close, then getting a new mortgage probably doesn't make sense.

3. Am I planning to stay in my home for a while?

We just talked about the fact that mortgage refinances involve paying closing costs, so you'll need to make sure you intend to stay in your home long enough to come out ahead financially after paying those fees.

Say you're charged $6,000 in closing costs to refinance, and your monthly mortgage payment drops by $250 thanks to the new loan. That means it will take you 24 months to break even, and on your 25th month of paying your new mortgage, you'll enjoy savings. If you think you might move within two years, then refinancing won't pay off.

Refinancing could result in some nice savings on your housing payments. But don't rush into a refinance without thinking things through. It's true that millions of Americans have refinanced their mortgages since the start of the pandemic, but that doesn't automatically mean it's the right move for you.

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