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If you’ve got a mortgage, it’s almost definitely one of your biggest financial burdens. And while experts expect mortgage interest rates to increase in 2021, they are still relatively low compared to where they were before the pandemic. That means it could still be a good time for you to refinance and save.
Right now, the average interest rate for a 30-year fixed-rate refinance is 3.30%, while a 15-year fixed-rate refinance comes with an average interest rate of 2.55%. Even if we’re no longer seeing the rock-bottom rates from the middle of the pandemic, homeowners looking to refinance can still find significant savings.
Clearly, those rates don’t exist in a vacuum, though, and refinancing only makes sense if it fits in context with your overall financial picture.
And while personal finance experts say a refinance could save thousands of dollars over the long-term for the right people, they’re also raising a big red flag. To secure a refinance that’s worth your while, you need to measure up to lending requirements.
That means you’ll need to be able to prove a steady income, a challenge many will face with the economic uncertainty that COVID-19 and its long-term repercussions continue to create.
What is Refinancing?
Refinancing a mortgage is when you take out a new loan to replace your existing one. You’ll keep your current house, but you’ll have a new mortgage with potentially different terms. Common reasons to refinance include:
- Getting a lower interest rate
- Moving from an adjustable rate to a fixed rate
- Eliminating PMI, or private mortgage insurance
- Shortening the term of your mortgage so you can pay it off sooner
- Increasing the term of your mortgage to lower your monthly payment
How Does Refinancing Work?
When you refinance your mortgage, you’re getting a new loan to replace your existing mortgage. You’ll have to go through many of the same procedures of getting a new house: applying for a loan, underwriting, home appraisal, and closing. The difference is that instead of shopping for a new house, you’ll keep your current home.
Just like when you apply for a mortgage for a new house, you’ll need to submit an application and meet lender requirements in areas such as credit score, debt-to-income ratio, and employment history. When you refinance, you can choose to go with your original lender or find a new one. You’ll also need to have enough equity in your home — typically at least 20 percent — in order to qualify for a refinance.
Keep in mind that you’ll also need to pay closing costs and fees, which can be 3%-6% of the loan’s value. This can add up to thousands of dollars, so crunch the numbers to make sure that the money you’ll save in interest actually exceeds the closing costs.
What is a Good Mortgage Refinance Rate?
There’s no set standard for a “good” refinance rate. Generally, a refinance rate should be at least 1% lower than your current mortgage rate for a refinancing to make sense, but you’ll need to crunch the numbers to truly understand whether a refinance makes sense for you.
One way to do this is to calculate the break-even point. Since closing costs and fees can require a hefty amount upfront, you want to make sure that the money you’re saving with a lower interest rate is greater than the amount you’re paying to refinance. By calculating the break-even point, you can see how long it’ll take to recoup the upfront costs for a refinance.
If you decide to refinance, make sure to shop around with multiple lenders to find the best rates. And keep in mind that even though national interest rates are low right now, the specific rates you may get will depend on personal factors like your credit score and debt-to-income ratio.
Before you jump on the refinance bandwagon, take a close look at your income stability. If you’re not entirely secure, think twice before embarking on a refinance loan journey.
When to Refinance Your Mortgage
Ultimately, to determine if you should refinance, crunch the numbers yourself. “I think it’s a good time to refinance if it’s right for your financial situation,” says Michael Chabot, SVP of residential lending at Draper & Kramer Mortgage Corp. Look for savings of at least a half percent, and make sure you feel extremely confident you’ll be able to cover your new monthly payment for the life of the loan.
Also, don’t feel rushed. Even though mortgage rates are slowly rising from the rock-bottom rates of late 2020, they still haven’t reached pre-pandemic levels. This means that there’s still time for homeowners to get a good deal.
However, just because market interest rates are low right now doesn’t mean a refinance is right for everyone. If you’re concerned about your job stability due to the effects of the pandemic, Chabot advises waiting to refinance. The refi process can take several months to complete, and that effort will be wasted if you don’t have a stable source of income when you’re ready to sign the papers.
Lenders have also tightened their requirements in the past year, so if your credit score is less than ideal, you might have trouble getting a good rate or even qualifying for a refinance at all.
The best time to refinance is the time that works best for your personal financial circumstances and goals. If you can get a lower interest rate and afford the closing costs, a refinance could help you save on your monthly payment. But if you’re not feeling certain about your finances in the coming months, it could make sense to wait a bit to explore a refi.