According to mortgage analytics company Black Knight, over 1.3 million well-qualified U.S. homeowners might save up to 0.75 percentage points on their mortgage by lowering their rate. These borrowers would save a sum of $405 million each month, or $320 per homeowner each month. When refinancing, the lower your interest rate, the more money you’ll save over time. According to most mortgage experts, a reduction of at least 0.75 percentage points (from 6.5% to 5.75%, for example) is ideal. However, a drop of as little as 0.50 percentage points may be beneficial in some situations.
If you are considering a refinance this year, it may make sense to do so sooner rather than later. Mortgage rates are expected to keep climbing—which means waiting could reduce (if not eliminate) your chance of finding a better interest rate. If you are unsure whether a refinance is the right move, read on for more information that will help you decide.
When Does Refinancing Make Sense?
When people notice mortgage rates falling below their current loan rate, they typically consider a refinance. However, there are other compelling reasons to refinance, such as:
- If you’re trying to pay off your debt sooner and with a lesser term.
- If you have enough equity in your property, you can refinance a loan without mortgage insurance.
- You want to borrow money against the equity in your home, but you don’t want to take on a lot of debt.
When Should You Refinance Your Mortgage?
A homeowner may refinance their mortgage to reduce monthly payments, pay off an existing loan and replace it with a new one, or both. There are several reasons why homeowners might want to refinance their mortgage:
- To obtain a lower interest rate.
- To shorten the term of their mortgage.
- To convert from an adjustable-rate mortgage (ARM) to a fixed-rate loan, or vice versa.
- To tap into their equity to address a financial crisis, make a significant purchase, or consolidate debt.
An initial mortgage is far more expensive than a HELOC, but homeowners must weigh the costs against the benefits of refinancing to make an informed decision. Refinancing may cost anywhere from 3% to 6% of a loan’s principal. Much like an original mortgage, refinancing also requires an appraisal, title search, and application fees, so it’s critical for homeowners to evaluate whether it is a smart financial move.
What Is a Reasonable Mortgage Rate?
Many individuals expect mortgage rates to follow when the Federal Reserve lowers short-term interest rates. However, mortgage rates do not always move in step with short-term rates. Avoid focusing on a low mortgage rate you’ve seen or read about because mortgage refinancing rates change daily. Furthermore, your rate may be higher or lower than the current published rate each time you call to find out.
The interest rate on your mortgage refinance is mainly determined by your credit score and the equity you have in your house. As long as your credit score is good and you can show proof of consistent income, you’ll be more likely to find a competitive quote.
According to Freddie Mac, the current average mortgage rate for a 30-year fixed-rate loan is 5.30%. If you can lower your current interest rate by at least 0.5 percent, it’s probably worth considering a mortgage refinancing. Lowering your interest rate from 6% to 5% will save you approximately $95 each month or $1,140 per year. If you can reduce the rate from 6% to 5%, your monthly savings would be $188 or $2,256 per year.
You don’t have to refinance into a 30-year loan. If your financial status has improved and you can make larger monthly payments, you may refinance a 30-year loan into a 15-year fixed-rate mortgage, which you can pay off faster while saving on interest. Two important things to take into account, besides your monthly savings, are the expenses of changing loans and the time it will take you to recover or break even.
The last component of the refinance puzzle is to balance your refinancing objectives with the change in loan length. Refinancing into another 30-year loan means you’ll be paying a mortgage for 40 years rather than 30 if you’re ten years into a 30-year mortgage. If your main goal is to lower your monthly payment, refinancing into a 30-year mortgage makes sense. However, if your objective is to save money on interest and shorten the duration of your loan, refinancing a 30-year mortgage to a 15-year mortgage may be the better option as long as you can afford the higher monthly payments.
How Much Does It Cost To Refinance Your Home?
Various factors will determine the overall cost of refinancing your home loan. The current value of your property and the sort of lender you deal with can influence the price. Typically, when refinancing, you should anticipate spending around 2% – 6% of the total value of your loan. This amount will cover all other closing charges, such as:
- Application Fees: Even if rejected, your lender may charge you for your application.
- Appraisal Fees: When you refinance, your lender will likely demand an appraisal. An appraisal usually costs between $300 and $500.
- Attorney Fees: An attorney may be required to review and file paperwork for your refinancing loan, depending on your state. The fees also vary depending on the region.
- Title and Insurance: Your lender will likely want a title search during the refinancing procedure.
Some homeowners may be able to include these closing costs into their total loan amount. However, it depends on the lender, the loan type, and how much equity you have. As a result, you may accept a greater mortgage rate in return.
How Long Does It Take To Refinance Your House?
You can get involved in speeding up the time needed to refinance your house. Prepare and research ahead of time if you want the process to move at a faster pace. Having essential documents on hand will help simplify things. So be sure to keep the following information on hand:
- W-2 forms
- Tax returns
- Pay stubs
- Bank statements
- Business financial statements
- Proof of employment
- Investment or retirement income
- Billing statements
- Homeowners’ insurance policy information
In most situations, this information must be current. Lenders usually want to see statements from the two previous years. So, before meeting with a lender, make sure you have the most up-to-date versions of all the documents mentioned earlier.
The Bottom Line
Refinancing can be a wise financial decision if it lowers your mortgage payment, extends the term of your loan, or helps you build equity faster. It may also be a valuable instrument for managing debt responsibly. Take some time to examine your finances and ask yourself these questions before refinancing: How long do I expect to live in my house? What money am I saving by refinancing?
The total cost of refinancing will depend on your current interest rate and the amount you borrow. It’s also important to remember that a mortgage refinancing costs 3% to 6% of the loan’s principal. It takes years to recover this expense with the savings generated by a lower interest rate or a shorter term. So, if you don’t expect to stay in your house for more than a few years, the fees will eat any potential savings from refinancing.
It’s also important to remember that a clever homeowner is always looking for ways to lower debt, enhance equity, save money, and terminate their mortgage payment. Taking money out of your equity when refinancing will not help you achieve any of those objectives.
Still confused? Feel free to contact us. We will guide you to the best possible outcomes.