Weekly Mortgage Refinance Demand Jumps 20%

Refinances are up. Should you get a new home loan?

Though mortgage rates have been competitive since the start of the year, last week, they experienced an unexpected drop. That extended to refinance rates, and existing homeowners were eager to take advantage.

The result? Mortgage refinance applications rose 20% for the week ending July 9 compared to the previous week's levels, according to the Mortgage Bankers Association.

Now it is worth noting that refinance demand was still 29% lower than it was the same week one year prior. But still, it's clear that borrowers were ready to capitalize on a sudden dip in rates.

If you've yet to refinance your mortgage, you may be wondering whether you should jump on the bandwagon and apply. You can answer these questions to decide.

1. How's your credit score?

The benefit of refinancing a mortgage today is getting an opportunity to lock in a pretty low interest rate, historically speaking. But you're more likely to qualify for that attractive rate if you come in with a strong credit score -- ideally, one in the mid-to-high-700s or higher.

If your credit score isn't in the best of shape, then it may not be the best time to refinance. In that case, you can work on boosting your score to apply for a refinance in a few months' time.

2. What does your current mortgage interest rate look like?

When you signed your mortgage, you may have been able to lock in a very low rate on it. If so, then refinancing may not pay. That's because if you can only lower your rate ever so slightly, it probably isn't worth the closing costs you'll be charged.

Closing costs are the different fees you'll pay to get a new home loan. They include things like application fees, recording fees, and appraisal fees.

Say you find out you qualify for a refinance at 3.2% interest on a 30-year fixed loan. If you're currently paying 3.5%, it could pay to wait to refinance until rates come down more, especially if you'll be charged several thousand dollars in closing costs. Granted, we don't know if mortgage rates will drop further, but on a $200,000 loan, the difference in monthly payments between a 3.5% and 3.2% interest rate is a mere $34.

3. How long do you plan to stay in your home?

As mentioned, you'll pay closing costs to refinance your mortgage. Those will generally amount to 2% to 5% of your loan amount. You'll need to make sure you intend to live in your home long enough to recoup those fees and come out ahead.

Here's an example: A refinance lender charges $5,000 to refinance a $200,000 mortgage. Refinancing saves you $250 a month, but it will take you 20 months to break even before you'll start reaping savings. If you plan to move within two years, refinancing won't make sense. But if you know you intend to stay in your home for five years at a minimum, it becomes a cost-effective move.

The fact that homeowners responded to lower mortgage rates last week by rushing to refinance isn't surprising. Even if rates fluctuate over the next number of months, they're likely to stay low for the rest of the year and probably beyond. So it pays to think about swapping your existing mortgage for a new one with more favorable terms.