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As long as today’s mortgage interest rates remain near these historic lows, the opportunity to refinance is there for homeowners who missed out on the earlier pandemic refi boom. So if you haven’t looked into what mortgage refinance rates you qualify for recently, it could be worth the time.
“For anybody who wants to refinance, they really need to talk to their bank or loan officer and run the numbers and see if that makes sense,” says Logan Mohtashami, lead analyst with HousingWire, a mortgage news outlet. If you can figure out what rate you’ll need for it to make financial sense, you’ll be ready to jump on a great deal.
Most experts recommend a rate that’s anywhere from 0.75% to more than 1% lower than your current interest rate for a refinance to make sense. But rates aren’t the entire story. Here’s what else you need to pay attention to if you’re going to refinance your existing home loan.
What to Know Before You Refinance
Refinancing isn’t as simple as swapping out one loan for another and walking away with a lower interest rate. Here is what to consider:
Closing costs and breaking even
There are always fees when you refinance, also called closing costs. They typically range from 3% to 6% of the loan balance. Even with a no-closing-cost refinance, you’re still paying. The fees are just added to your total loan balance or built into a higher interest rate.
To make sure the refinance savings outweigh the cost of closing, you need to figure out how long you plan on staying in the home and your break-even period.
Here’s how to figure out your break-even timeline:
- Using the NextAdvisor refinance calculator, enter the following information:
- Current monthly payment
- Loan balance
- Years remaining on your loan
- Current property value
- Next, select a mortgage refinance term from the drop-down menu:
- Monthly savings: The calculator will show you how much you could save per month with a refinance.
- Estimate closing costs: anywhere from 3%-6% of the total loan.
- Example: 4% of a $225,000 loan=$9,000
- To get your break-even period, take the total closing costs estimate and divide it by the monthly savings using this equation: closing costs / monthly savings = break-even period (in months)
- Example: $9,000 (closing costs) / $280 (monthly savings) = 32.14 months
In the above example, you would break even in roughly 32 months — or just under three years. If you sell your home or refinance before the break-even period, then you didn’t end up saving money.
You should also pay attention to the repayment term on your new loan. If you have been paying your mortgage for 10 years, and you take out a new 30-year refinance loan, you’ll have been paying a mortgage for 40 years by the time it’s all said and done.
Another option is to get a 30-year mortgage and make payments as if it was a 20-year loan. This gives you the option to pay the lesser amount with the 30-year while also paying off your mortgage faster.
Depending on your financial goals, you could turn your home’s equity into money in the bank with a cash-out refinance. With a cash-out refi, you’ll increase your loan balance and get the difference in cash at closing. With rates as low as they are, this is an opportunity to pay off other high-interest loans or to invest in home improvements that raise the value of your property. Although a cash-out refinance isn’t guaranteed to lower your monthly payments, it may still make sense for you, depending on your goals.
Credit score and equity
The low rates you see online may not be what you actually get. Rates are heavily determined by your credit score, mortgage type, repayment terms, and the equity you have built up. Speak to your lender about your finances to determine what rate you’re eligible for before putting a full application and credit check. But any rate you’re quoted can change up until you submit an application, have your credit pulled, and lock your rate.