Is it a good time to refinance?
Refinance interest rates have been at historic lows, so many borrowers are probably considering refinancing their current mortgages. However, interest rates aren’t the only factor to think about. So, as a borrower, how do you know if now is a good time to refinance?
Most lenders require 5% to 20% home equity to refinance.
Deciding when to refinance depends on the borrower's circumstances, not just low interest rates. If you have good credit, plan to stay in your home for a long time and currently have a high mortgage interest rate, it might be a good time for you to consider refinancing. However, if you plan to move soon, are having a hard time financially or already have a competitive mortgage rate, it could be the wrong time to consider a new loan.
Questions to ask yourself if you're considering refinancing
Before refinancing your current mortgage, there are a number of questions you should be asking about the current mortgage environment and your own financial situation.
- What is my current mortgage rate? Some advisors say you should consider refinancing if your new mortgage rate will be at least 1% lower than your current mortgage rate. However, in some situations it might make sense even if the new mortgage rate is lower by just 0.5% or less.
- What will my break-even point be? While the lower mortgage rate might look attractive, there are many costs involved with refinancing. It's important to look at these costs in relation to how much you're saving each month. For instance, if your closing costs and fees are $10,000 and you're saving $200 a month on your mortgage after the refinance, you would break even after 50 months. If you're living in your forever home, this might make sense. However, if you plan to move within the next year, it probably isn’t worth it.
- Am I currently paying mortgage insurance? If you have less than 20% equity in your home, you likely are paying mortgage insurance. The insurance can add hundreds of dollars to your monthly mortgage payment. Refinancing might make sense if you can eliminate this payment. You can request removal of private mortgage insurance once you have 20% home equity.
- Do I have a fixed-rate or adjustable-rate mortgage (ARM)? If you want to switch the type of home loan you have, you might benefit from refinancing. For example, if you currently have an ARM and the fixed-rate interest rate you qualify for now is low, you can refinance from an ARM to the fixed-rate loan locked in with the lower rate.
Current conventional national mortgage rates
Rates are effective 10/19/2021 and are subject to change without notice. APR shown is provided by a partner of ConsumerAffairs.
The APR shown of 3.320% is available for a 30-year fixed rate loan in the amount of $200,000 for consumers with loan-to-value of at least 80%.
The APR shown of 3.008% is available for a 20-year fixed rate loan in the amount of $200,000 for consumers with loan-to-value of at least 80%.
The APR shown of 2.666% is available for a 30-year VA fixed rate loan in the amount of $200,000 for consumers with loan-to-value of at least 80%.
The APR shown of 2.368% is available for a 10-year fixed rate loan in the amount of $200,000 for consumers with loan-to-value of at least 80%.
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How to find the best refinance rates
The less equity you have, the higher the interest rate will be.
When looking for the best refinance rates today, there are several things to consider.
- Compare multiple lenders. All lenders have different qualifications and offer different refinance interest rates depending on your finances.
- Consider interest rates and closing costs. If you find a great interest rate, but there are high closing costs, the refinance might be a bad idea, depending on your break-even point.
- Read the fine print. Check the terms for loan offers with low interest rates, and be sure to compare annual percentage rates (APRs) to learn the total cost of different loans.
Finding the best interest rate is only one aspect of refinancing. Looking at your personal goals for refinancing and seeing if a lender can meet these needs is the most important objective.
What are the pros and cons of refinancing?
There are both pros and cons to refinancing.
Some pros include:
Potential drawbacks of refinancing include:
- Closing costs
- Failing to break even if you move soon after refinancing
- Lengthy loan process
- Possible prepayment penalty on your original mortgage
Refinance rates FAQ
- What is mortgage refinance?
- A mortgage refinance is the process of getting a new loan to replace the current mortgage you have on your home. There are several reasons to do this, including getting a better interest rate, changing the length of your term or switching to a different type of mortgage.
- How much does it cost to refinance?
- Usually the closing costs for a refinance are about 2% to 5% of the loan amount.
- What are the types of refinancing?
- There are several types of refinancing loans.
- Traditional refinance (rate-and-term): In a rate-and-term refinance, you refinance for a new interest rate and new loan term; this is the most common refinance option.
- Cash-in: In a cash-in refinance loan, you pay cash to lower the new loan amount, which can decrease your monthly payment.
- Cash-out: The bank gives you cash in the refinance, but the amount of the new loan is more than what you owe on your existing mortgage.
- Streamline: This type of refinance loan is available for USDA, FHA and VA loans. The process is shorter than with a traditional refinance.
There are also options that allow for no-closing-cost refinancing, which usually have higher interest rates and rolled-in closing costs, where the lender rolls the costs into the total loan amount.
- How do you refinance a house?
- To refinance your home loan, you can contact a mortgage lender. It's best to compare different lenders and loan officers to see which best suits your needs. Note that you don't have to use your current lender to refinance.
- What are mortgage refinancing requirements?
- Different lenders have different requirements for refinancing. Some of these requirements may include:
- At least 5% to 20% of home equity
- A strong payment history on your current loan
- A minimum credit score
- Stable employment
- Debt-to-income ratio limit
Is it worth it to refinance?
Mortgage interest rates are at a historic low, so you might be tempted to refinance your home loan right now. However, the interest rate isn't the only factor to consider when refinancing a mortgage — if you plan to stay in your home and are just looking to lower your interest rate or monthly payment, refinancing might be a good choice for you. If there’s a possibility you'll move before you reach the break-even point, it could be best to wait. The most important thing to remember is to consider different lenders and your long-term financial goals.
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