When to Refinance Your Mortgage

ant-design:home-outlined copy Mortgage Refinance Series

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Knowing when to refinance is as important as knowing why. It’s true: Mortgage refinance rates are low, and if your original rate was locked in at a higher percentage point, you might be able to score a lower rate in the current pandemic-damaged economy. However, there are other factors to take into consideration. Jill Schlesinger, CBS news analyst and author of “The Dumb Things Smart People Do With Their Money,” says there are some times when a mortgage refi is not in your best interest. Other experts weighed in as well.   

Is Now a Good Time to Refinance?

In general, yes: If you’re wondering when to refinance your mortgage, now is a good time. “I think for a lot of people there’s an interesting confluence of things occurring that makes this a very good time,” says Schlesinger. Not only are rates low, but home appraisals are favorable right now, so your home may have more value than it had in the past, meaning you could have more equity in it than you realize. Another benefit, she says, is you may be able to eliminate private mortgage insurance (PMI) when you refinance, thus saving money in your monthly payment.

Pro Tip

If you are secure in your job and expect to be in your home for more than a few years, this is a great time to consider refinancing. “Any time you are going to be in your house for the foreseeable future and can save one half to three quarters of a percentage point on your interest payment, it’s worth considering,” says Greg McBride.

Is It Better to Strike Now or Wait and See?

There’s no clear answer to the question of whether you should strike now or wait until later, but Schlesinger stresses it’s impossible to know how low the market will go, and waiting for lower rates in an already-low market may be a strategy that backfires. “If a refinance improves your situation, then go for it. If it doesn’t, don’t,” she says. “Don’t try to time the market. If you can do this and save money, you don’t have to find the absolute bottom.”

Our experts tell us the pandemic has led to a longer wait than usual for your refi as more homeowners look to save. Lenders have been inundated with applications, and applying now may mean a delay of months before they can handle your application. Many lenders have employees working from home during the pandemic; this also means longer waits. Waiting a few months may mean the logjam will clear up and you’ll get through the process more quickly. “You need to decide if you want to get on the highway while it’s gridlock traffic or wait a few months for the gridlock to break up and see if it gets easier. The rates aren’t going to go up that fast,” says Greg McBride, CFA, chief financial analyst for Bankrate.com. 

Reasons To Not Refinance 

Schlesinger says those who are moving in the next few years won’t be in their homes long enough to make up for the expenses incurred during the refi. “Let’s say that I am saving $100 a month, but the whole refi process cost me $5,000,” she says. “It’s going to take a while for me to recoup my savings.” You’d be saving $1,200 a year in Schlesinger’s example, but if you move in two years, you’ll only have recouped half of the refi costs.

McBride, meanwhile, says you should avoid trying for a refinance if you find yourself unemployed during the pandemic, no matter how appealing it might be to have a lower mortgage payment. “Banks probably won’t consider you for a refinance if you’re out of work,” he says. McBride agrees with Schlesinger that it wouldn’t make sense to refinance if you may not be living in the home long enough to see savings. He reminds us, sadly, unemployment can lead to losing your home altogether. 

It’s also important to consider your credit rating, McBride says. Your ability to score a new mortgage at a lower interest rate is dependent on your credit history. If you have a low credit rating, you may not qualify for an interest rate worthy of savings.

Austin Weyenberg, founder of financial literacy site The Logic of Money, says another good reason to avoid a refinance is if you only purchased your home within the past year or so. “You will be hit with more upfront fees, which could end up costing you more than it would save you when you refinance,” he says. Considering fees for your first mortgage may have run as high as $5,000, it doesn’t make sense to go through the process again so soon and incur similar charges again for your second time around. 

Here’s An Example

Let’s assume you’re trying to decrease your monthly payment on your mortgage. You owe roughly $100,000, and are paying a current interest rate of 4.875%, with 15 years left to go on a 30-year mortgage. After some research, you find a lender offering a rate of 3.29% on a 15-year fixed rate. Here’s how the numbers might run:

Monthly Payment at 4.875%$850
Monthly Payment at 3.29%$704.61
Monthly Difference $145.39
Yearly Difference$1,744.68
10-year Difference$17,446.8
15-Year Difference$26,170
Approximate cost of refinance [One point: $1,000, Application fee: $65, Attorney’s fee: $200, Appraisal fee: $150, Document preparation: $50, Local fees: $200, Title search: $65]$1,830
Months to recoup costs12.59

Try filling out your own version of these numbers to see whether now is the right time for you to refinance.

Is Refinancing Right For Me? 

Only you can look at the pros and cons of refinancing a mortgage and determine if it’s right for you. As we’ve seen, the COVID-19 pandemic, which has created chaotic economic conditions, has actually opened up a window of opportunity for individuals who are relatively financially stable to consider refinancing a home. 

But note if you are currently experiencing financial difficulties, experts caution you to go slow. Lenders don’t look favorably at applicants without evidence of a steady income, even if the lack of income is related to the pandemic. If you have a two-income family, you may be fine as long as one household member is pulling in a paycheck. Still, if COVID-19 has eliminated your family’s income, you may have difficulty finding a banker who’s willing to work with you even if you have a great credit rating. 

ant-design:home-outlined copy Up next in the Mortgage Refinance series