Is Now the Right Time to Refinance Your Mortgage?

Some Americans increased their credit card debt amidst the COVID-19 quarantine isolation period, while others managed to pay down debt with lower interest rates and lower monthly bills.  Savings to pay down debt was made possible because expenses like fuel purchases and dining out were greatly diminished as a result of orders to stay or work from home. Another strategy available to consumers to lower personal debt was through refinancing a mortgage, where rates were at historically low levels. Despite an increase to the low mortgage rates seen earlier this year, mortgage rates continue to remain at an all-time low. Currently, the mortgage rate for a 30-year fixed loan is 3.405%. If you haven’t locked in a lower mortgage interest rate previously, you may want to explore whether a refinance is best for you. A decrease in mortgage interest rates by even 0.5% to 1% could lead to sizable savings.

Reasons to Refinance

There are advantages worth delving into when making a decision to refinance. Namely, this strategy can reduce your interest rate or lower your interest costs over the life of your loan. Lowering the mortgage interest rate or shortening the loan term can both lead to lower interest costs in the long-run. Another benefit to refinancing comes through eliminating private mortgage insurance (PMI), which can be requested once 20% of the principal balance of the loan has been paid. Mortgage Insurance premium (MIP) is a feature specific to FHA loans and continues through the life of the loan unless 10% or more equity is paid down. Refinancing to a conventional loan is a way to eliminate the FHA mortgage insurance.

Factors to Consider When Deciding Whether to Refinance

Financial savings through refinancing is dependent on specific factors. Know that your credit score matters—mortgage refinance lenders are more likely to work with individuals that have a higher credit score. And, because credit score influences the interest rate available, qualified borrowers with a higher credit score are eligible for lower rates. Conversely, lower credit scores are consistent with higher interest rates. Next, shifting from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or the other way around, cand be a good financial decision. With a fixed-rate mortgage, the interest rate stays the same for the life of the loan regardless of changes in market conditions or interest rates. With an ARM, the interest rate may change over time. Because interest can shift up or down depending on the market, opting for an ARM is advantageous when rates are falling and you are not planning on staying in your home past the initial fixed-rate period or plan to refinance at that point.

What You Need to Know About Costs to Refinance

The decision to refinance isn’t complete without attention given to closing costs. From mortgage points, to home appraisals, to title searches—the cost to refinance can range between 2% to 6% of the loan amount. Additionally, these fees are dependent on mortgage types, the term of the loan, the amount of equity in your home, and your credit score. If you are looking for ways to decrease your refinance closing costs, shop around with multiple lenders and try to work with the same title insurance company.