15 Mar When Does It Make Sense To Refinance?
It’s more than just getting a lower mortgage rate. You want to consider how long you plan to stay in your home and calculate your refi break-even point.
With mortgage rates near rock bottom, it’s a good time to refinance a mortgage, right? Sure, in many cases, no doubt.
As a matter of fact, 17% of U.S. homeowners with a mortgage on their primary residence refinanced in 2020, according to a September NerdWallet survey conducted online by The Harris Poll among 1,413 U.S. homeowners. And nearly one-third (31%) of homeowners with a mortgage on their primary residence said they were considering refinancing within the next 12 months, according to the survey.
To know if it’s the right time to refinance, first determine how long you plan to stay in your home, consider your financial goals and know your credit score. All of these things, along with current refinance interest rates, should play a role in your decision about whether — and when — to refinance.
When does it make sense to refinance?
The usual trigger for people to start thinking about a refinance is when they notice mortgage rates falling below their current loan rate. But there are other good reasons to refinance:
- If you’re looking to pay off the loan quicker with a shorter term.
- You’ve gained enough equity in your home to refinance into a loan without mortgage insurance.
- You’re looking to tap a bit of your home equity with a cash-out refinance.
What is a good mortgage rate?
When the Federal Reserve lowers short-term interest rates, many people expect mortgage rates to follow. But mortgage rates don’t always move in lockstep with short-term rates.
Avoid focusing too much on a low mortgage rate that you read about or see advertised. Mortgage refinance rates change throughout the day, every day. And the rate you’re quoted may be higher or lower than a rate published at any given time.
Your mortgage refinance rate is primarily based on your credit score and the equity you have in your home. You’re more likely to get a competitive rate as long as your credit score is good and you have proof of steady income.
Is it worth refinancing for half a percent?
An often-quoted rule of thumb has said that if mortgage rates are lower than your current rate by 1% or more, it might be a good idea to refinance. But that’s traditional thinking, like saying you need a 20% down payment to buy a house. Such broad generalizations often don’t work for big-money decisions. A half-point improvement in your rate might even make sense.
To determine if refinancing makes financial sense for you, it’s a good idea to run the real numbers with a mortgage refinance calculator.
To calculate your potential savings, you’ll need to add up the costs of refinancing, such as an appraisal, a credit check, origination fees and closing costs. Also, check whether you face a penalty for paying off your current loan early. Then, when you find out what interest rate you could qualify for on a new loan, you’ll be able to calculate your new monthly payment and see how much, if anything, you’ll save each month.
You’ll also want to consider whether you have at least 20% equity — the difference between its market value and what you owe — in your home. Check the property values in your neighborhood to determine how much your home might appraise for now or consult a local real estate agent.
If you have any more questions about refinancing, just contact us by calling (626) 836-9156 or by filling out the online form here.