When mortgage rates go down, the number of refinance candidates goes up.
And with rates hovering around 3% right now, there are 13.8 million homeowners who could be considered “high-quality candidates” for a refinance, says Mitch Cohen, director of public relations for mortgage data firm Black Knight.
Those 13.8 million refinance candidates all have 30-year mortgages with rates 0.75% or more above today’s prevailing 30-year rate, Cohen says. A 0.75% or more interest rate reduction can provide significant savings for these homeowners: about $290 a month, Cohen says.
If you meet the following criteria, Cohen says you could be among these millions of homeowners who could save money by refinancing:
- 720+ credit score
- At least 20% equity in the home
- Current on mortgage payments
- Ability to reduce interest rate by at least 0.75%
Even if you fall into this group, there is plenty to consider to make sure a refinance makes sense, from closing costs to how long you plan to be in the house.
“Homeowners need to be really careful to make sure that the refinance actually makes sense for them,” says Kyle Seagraves, certified mortgage advisor with the homebuyer education site and YouTube channel Win The House You Love.
So before you sign the bottom line on a mortgage refinance, here is what you need to look at first:
Does A Refinance Make Sense For You?
When you’re thinking about refinancing, you should look at the numbers and make sure it makes sense. But you’ll also want to take a step back to reassess your broader goals for your life and your finances.
Will the savings outweigh the cost?
Refinancing isn’t free. Approach the decision to refinance as an investment, as something you’re paying for, to make sure you’re getting back more than you put into it. “A lot of people don’t realize that you have to pay upfront money to get monthly cost savings,” Seagraves says.
Be sure to factor in the closing costs when deciding on a refinance, and remember, even a “no-cost” refinance has fees.
Closing costs: Every time you refinance, you’ll pay closing costs that typically range from 3% to 6% of the loan amount. And just like with your interest rate, these fees vary by lender. “Pay attention to closing costs that the lender controls,” says Matthew Garland, division manager with the Garland Mortgage Group and co-host of the Rants & Gems real estate podcast. The main fees the lender sets are origination fees and discount points found in section A of your Loan Estimate.
No-closing cost refinance: If you pay little to nothing out of pocket with a no-cost refinance, that just means there are extra fees that get rolled into your balance. Don’t fall into the “I lowered my monthly payment” trap and not account for closing costs, Seagraves says.
Break-even point: Once you know how much less interest you’re paying each month, then you can calculate your break-even point. If you’re saving $200 a month in interest and have $15,000 in closing costs, it will take you 75 months, or just over six years, to break even. Once you know your break-even point, then it’s easier to determine if you plan on keeping your home long enough to justify the cost of a refinance.
Will the refinance help you achieve your financial goals?
Whether or not a refinance makes sense for you depends on what you’re trying to accomplish. Here are some common refinance goals, and how to consider whether they make sense for you:
Pay off a mortgage sooner: For homeowners who desperately want to pay off their 30-year mortgage, it can make sense to refinance to a shorter-term loan. With a 15-year refinance, you’ll get a lower interest rate and pay much less in total interest, but you’ll be committing to a larger monthly payment.
Here’s an example:
|Loan Term||Loan Amount||Interest Rate||Monthly Payment||Total Interest Paid Over Loan’s Life|
Staying liquid: A 30-year loan’s lower payments give you much more flexibility if something unexpected happens, such as a job loss. So if you don’t want the extra risk of having larger payments, you could take out a 30-year loan and pay it as if it were a 15-year loan. Then if you have a reduction in your income, you aren’t locked into the higher monthly payments. The only trade-off is that 30-year loans have higher interest rates.
Special projects: Recently, Garland was working with clients considering a standard rate and term refinance and wanted to invest in rental properties. “It made more sense for them to do a cash-out refinance to pull some equity out,” Garland says.
Cash-out refinances can also work for home improvement projects and paying off other high-interest debt. A cash-out refinance will increase your loan balance, but it can still make sense if you have a sound plan for the money.
No matter what your situation is, getting a better mortgage rate is only the beginning when it comes to refinancing. It’s essential to pay attention to the cost of the loan, and to consider if refinancing is the best option for accomplishing your goals.