When mortgage rates plunge, many homeowners decide to refinance their home loans. While refinancing activity rose in 2020 with lower interest rates, it may not always be the best time to refinance. Knowing when you should refinance in your specific situation is critical.
This article will tell you what you need to know about mortgage refinancing, when you should do it, and when you may want to hold off.
When Refinancing Is a Smart Move
If refinancing your home loan will save you money, build equity, and pay off the loan faster, it’s a smart move. With 30 year refinance mortgage rates in the 2.5% range at the end of 2020, even people with a new home loan might benefit from doing a refinance.
Many financial experts advise considering a refinance if you can drop your interest rate by .5% to .75%. Lowering your rate by this much can substantially decrease your payment.
However, check that your total savings per month offset the cost of getting a new loan. Refinancing may be a wrong move if you intend to move in the next 24 months. In this situation, you don’t have enough time to recoup your refinance costs.
The question of when to do a refinance is not merely about interest rates, though. A critical factor is whether your credit score is high enough to qualify for the right loan. Mortgage loan rates are set by several market factors, such as yields on specific Treasury notes. Naturally, the lowest rates and terms are reserved for people with the highest credit scores.
Other factors to consider are your financial goals, how long you will stay in the home, how much equity is in the property, and your general financial condition.
Is Refinancing Worth The Trouble and Cost?
There are many ways you can refinance your mortgage. Finding the best loan for your situation hinges on your goals. If you have an adjustable-rate mortgage, you may want to switch to a fixed-rate home loan now, given you can get a refinance rate as low as 2.5%.
Or, perhaps you want to reduce the loan term from 30 to 15 years. Yes, your payment will rise by 30% or so, but you will save thousands in interest charges over the years.
A mortgage refinance also is useful to eliminate private mortgage insurance if you have 20% equity in the property.
Many homeowners choose a rate and term refinance that reduces their rate and gives them a lower monthly payment. Some homeowners may desire a lower payment to provide them with more cash for other costs, such as a car loan or college tuition.
What About A Cash-Out Refinance Mortgage?
Some homeowners choose a cash-out refinance mortgage. This loan involves borrowing more than you owe on the property. Common uses for the excess cash include paying off credit card debt, paying for home remodeling, or paying for college tuition.
Paying off high-interest loans with low-interest home equity can make sense. But if you start using credit cards again, you now have a higher mortgage and credit card bills also.
The property secures your home loan, so if you miss mortgage payments, you could face foreclosure. Just remember, if you take out equity, you are putting your home at risk if you cannot pay the higher loan.
How Long To Recoup Refinancing Costs?
Your new interest rate is not the only cost to consider when weighing whether you should refinance. It costs thousands of dollars to take out a new mortgage. Many financial experts say you should expect to pay 2-5% of the loan principal in closing costs.
For example, if you take out a loan of $200,000 and have 3% in closing costs, you will owe $6,000 when the loan closes. You can roll that cost into the principal, but remember you will pay interest on your closing costs for years.
To determine if your refinance makes financial sense, you should calculate how long it takes for the loan cost to pay for itself. If you intend to sell the home before you break even, you will lose money on the refinance, so it may not be worth it.
To find out what your break-even point is, divide your total loan costs by the amount you will save each month with the new loan payment.
Break-Even Point Example
For example, say the new home loan saves you $190 each month, and you have $3,000 in closing costs. When you divide your closing costs by $190, it will take you approximately 15.5 months to break even. If you want to sell the home before the break-even point, refinancing is not worth the cost.
How Long To Refinance Your Mortgage?
The time to refinance your home depends on the mortgage lender. Also, important factors are how long inspections take, credit checks, home appraisals, and other loan requirements. You can check lender websites to find various home loans, check interest rates, complete applications, and submit required documentation.
The good news is technology has improved in the mortgage industry, so the loan application process has been streamlined.
With such conveniences as online mortgage applications, document-signing applications on smartphones, and e-signatures, you can do most loan application requirements without printing anything. Times vary, but the average refinance takes about a month.
Low interest rates in 2020 make many homeowners decide to refinance, but it is essential to consider other factors before deciding to pull the trigger. How long you intend to live in the home, your credit score and your financial goals should be taken into account as well before you decide to refinance.
If you do refinance, getting the deal done quickly has never been easier, and there are many mortgage refinance companies eager for your business.
- Mortgage Refinance Overview. Accessed at https://www.investopedia.com/mortgage/refinance
- How To Decide If You Should Refinance Your Mortgage. Accessed at https://www.fox5atlanta.com/money/deciding-to-refinance-your-mortgage
- With Rates At Historic Lows, Now’s The Time to Refinance. Accessed at https://www.fool.com/investing/2020/11/16/with-rates-at-historic-lows-nows-the-time-to-refin/