Should You Refinance Your Mortgage Now?

There are still great opportunities to save by refinancing.

In recent months, many Americans have taken advantage of an unprecedented opportunity to refinance homes at record-low mortgage rates. As mortgage rates fell, homeowners were able to drop their monthly payments and reduce total interest costs by applying for a refinance loan to pay off their existing mortgage balances.

Over the past several weeks, however, demand for new mortgage loans has fallen off slightly as rates have begun ticking upward from recent historic lows. If you're thinking about refinancing, you may be wondering if it's a good time to apply for a new loan in light of what's been happening with rates.

Before you decide, here's what you need to know.

Rates remain very low by historical standards

Although mortgage refinance rates have recently trended up slightly, they are still well below pre-pandemic levels.

As recently as January 2020, the average interest rate on a new 30-year mortgage loan was above 3.50%. Many borrowers who obtained loans to buy homes in 2019 or prior likely had loans rates close to or even above 4.00%.

Meanwhile, refi rates right now (which always tend to be a little higher than the rates for new home loans), are hovering in the low 3% range. In other words, unless you obtained a mortgage or refinanced since the start of the pandemic, there's a very good chance you could still qualify for a refinance loan at a rate well below what you're currently paying on your home loan.

No one can predict the future of mortgage rates

If you're hoping for rates to drop again, you may be disappointed. There's certainly a chance they might, especially as there's reason to believe mortgage rates may stay low for a while. However, they could just as easily continue climbing upward.

Unfortunately, while experts can make predictions, no one can really know for certain what's likely to happen. And if you wait to refinance in hopes that you'll be able to see a slight rate drop again, you could end up seriously regretting it. If rates instead keep rising, you could miss out on the chance to reduce the cost of your home loan.

You need to be in a financial position to refinance

Ultimately, the key factor in determining whether you should refinance now is how refinancing fits into your personal financial situation. Specifically:

• How much savings can you realize by refinancing? You can use The Ascent's mortgage calculator to compare the payments and total interest costs of your current loan with a refinance loan. This will help you see whether you can reduce your monthly bills and repayment expenses over time.
• How long do you plan to remain in your home? Refinancing comes with closing costs, which can total as much as 2% to 6% of the cost of your loan. If you've reduced your interest rate, the savings can eventually make up for this initial upfront cost. But since it takes time for the savings in your monthly payment to cover the money paid out at closing, make sure you'll be in your home for a while before refinancing.
• Can you qualify for a refinance loan at a competitive interest rate? Lenders have gotten stricter in who they allow to refinance. You'll need good credit, a stable job, and enough income to pay off the loan in order to refinance at the best rates. If you don't have solid financial credentials, you may want to stick with your current loan while working on improving that.

By taking all of these factors into account, you'll be able to make the best choice about whether it makes sense to refinance your mortgage now.