Refinancing your mortgage? 5 questions you should ask first
With interest rates low, homeowners may opt to refinance – but not without a good review of potential outcomes. (iStock)
U.S. homeowners are on a refinancing binge in 2020, with mortgage refinance rates up by 98% from mid-November 2019 to the same period in 2020, according to the Mortgage Bankers Association (MBA). The average mortgage refinance amount stood at $291,000 for the week ending November 13, 2020, the MBA reported.
If you're considering refinancing your mortgage right now, you're going to want to do your research. Multi-lender marketplace Credible is a great place to start. With Credible, you can compare interest rates and mortgage lenders online and determine which can offer you the best deal. Don't miss out on savings — get started today!
If you're still unsure if refinancing your mortgage is the right move, don't worry. There are some easy ways to determine if now is the time to act. You just have to do your research. Here are some questions you should ask yourself before submitting an application for a mortgage refinance.
- Should you refinance your mortgage when rates are low?
- Is refinancing worth the cost?
- What happens to mortgage insurance?
- What about closing costs?
- When's the best time to refinance your mortgage?
1. Should you refinance your mortgage when rates are low?
The reason mortgage refinancing deals are so hot in late 2020? It’s all about submarine-level interest rates, which are in decline thanks to a U.S. Federal Reserve economic policy that favors low rates, primarily to spur spending and credit amidst a historic global pandemic.
There are several reasons to refinance your mortgage immediately to take advantage of today's low rates. You could secure a lower mortgage rate, change your loan terms, and lower your monthly payments. Plus, a new mortgage refinance fee is going into effect soon and mortgage rates aren't going to stay this low forever.
“I recently refinanced my primary residence to a lower interest rate which reduced the loan term by five years,” said Jonathan Sanchez, a real estate investor and personal finance specialist at ParentPortfolio.com. “I plan to put the extra money I've saved with the refinancing and put it towards the principal balance. That should reduce my mortgage’s loan term by another four years.”
So, in short, if you're able to and you are in good shape financially — the answer is yes. Visit Credible to explore all of your mortgage refinancing options. There you can compare prequalified interest rates from multiple lenders within three minutes.
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However, just remember to consider your financial situation before you make an executive decision. For example, you have to be prepared to stay in your home for a while to offset closing costs and fees. Plus, it's a good idea to use a mortgage refinance calculator to crunch the savings to see if it's worth it long-term.
2. Is refinancing worth the cost?
Basically, a mortgage refinance loan can save homeowners money by reducing a mortgage loan’s interest rate from the old loan into the newly refinanced one.
“This allows homeowners to reduce their monthly mortgage payment and/or reduce the term of the loan. However, there are closing costs associated with a mortgage refinance loan,” Sanchez stated. “Therefore, a homeowner needs to live in the house for at least a certain period to truly benefit.”
Key issues like loan refinancing costs, which can be prohibitive depending on the size of the mortgage loan (the average closing cost for a mortgage refinancing loan is 3% to 6% of the borrower’s mortgage principal amount) and homeownership timetables generally reduces the benefits of a refinancing deal.
That’s why Sanchez looks for a “sweet spot” before signing off on any new mortgage loans.
“I recommend refinancing a mortgage loan if the difference between the current interest rate and the new interest rate is at least 0.75,” he said. “Otherwise, paying extra towards the principal balance can help pay off the loan sooner.”
Again, it's a good idea to use a tool like Credible to determine if the short-term costs are worth the savings in the end. Enter some personal information into Credible's tools to determine if refinancing your mortgage right now is a good move for you financially.
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3. What happens to mortgage insurance?
Another big factor in play — mortgage insurance may go away under a new refinancing deal.
“In addition to home mortgage rates being low, property values are at record highs,” said David Dye, a mortgage broker and founder of GoldView Realty, in Torrance, Calif. “This is very important as mortgage insurance is calculated based on the value of the house and the loan amount.”
According to Dye, homeowners who recently purchased with less than 20% down may find rising home values that put them over the 20% equity requirement to avoid mortgage insurance.
“With mortgage rates calculated based on the loan-to-value ratio, higher prices lead to better rates available to borrowers,” Dye said. “This makes it the optimal opportunity to refinance a loan if you are paying mortgage insurance.”
4. What about closing costs?
While high closing costs and the notion that the mortgage loan “resets” after a refinancing deal could be deal-breakers, Dye also urges homeowners to look at the big picture before making any snap decisions.
“In a refinance transaction, the closing costs can often be rolled into the loan so there is no out-of-pocket cost,” Dye noted.
Given that reality, Dye encourages his mortgage clients to look at two issues before they decide on a refinancing deal.
How many months will it take to recoup the costs of the refinance (costs divided by monthly savings)?
Is the homeowner planning on keeping the home longer than the monthly answer to question #1?
“If the answer to the second answer is yes, the refinance is often worth it,” Dye said. “Even with costs rolled in, the savings are often well worth it in the long term.”
To understand just how much you could save on monthly mortgage payments by refinancing now, crunch the numbers and compare rates using Credible's free online tool. Within minutes, you can see what multiple mortgage lenders are offering.
5. When's the best time to refinance your mortgage?
If the real question comes down to paying down the mortgage loan as is, or restructuring the loan into a refinance deal, age and the number of years paid into the home become a big factor.
“One of the only scenarios where it’s more beneficial to pay a home mortgage off straight away rather than refinance is if you're already within a few years of paying it off,” said Erik Wright, owner at New Horizon Home Buyers, in Chattanooga, Tenn. “If you’re older and have owned your home for a long period of time, then the cost of the refinance may be more expensive than any interest you save.”
But if you've been a homeowner for a few years, aren't close to retirement, and plan on staying in your home long-term, then now is likely a good time to refinance.
“If there's still a good amount of years left on your mortgage, however, refinancing with a lower interest rate can help achieve the goal of paying off a property faster,” Wright said.
Visit Credible to connect with an experienced loan officer and get your mortgage questions answered.