Is now the right time to refinance your mortgage?



With current interest rates on average only 2.86%Refinancing your mortgage can be a good way to bolster your finances. A lower rate means lower monthly payments, freeing up money for other purposes.

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Good time to refinance

As the economy stalled last year as a result of the COVID-19 pandemic and interest rates fell to a minimum, homeowners rushed to refinance their homes.

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Mortgage lenders refinanced a record $ 2.8 trillion in 2020 and homeowners’ interest in refinancing remains high. Refinancing loans accounted for 67% of all mortgage applications in the second week of August, according to Mortgage Bankers Association

While many homeowners have already refinanced their home loans, many others are still benefiting. As of July 22, more than 15 million mortgage borrowers were able to cut their interest rates by at least 0.75 percentage points and were eligible to do so. According to the analyst company, these borrowers can save a total of $ 4.5 billion in monthly payments. Black Knight

The decision to refinance is a big step that can either save money or ease your financial burden. It makes sense to at least research the opportunity, take a look at the pros and cons, and see if refinancing your mortgage is the right option.

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If your current mortgage rate is higher than 3.86%, now is a good time to refinance.

Mortgage rates for highly qualified borrowers have hovered around 3% or less over the past four months. The current average for a 30-year fixed rate loan is 2.86%. Rates will likely rise eventually, but there is no indication that rates will rise significantly in the near future. You should take the time to find out if refinancing makes sense.

One sign that refinancing is a good idea is that you can lower your current interest rate by at least 0.5% to 1%.

If you have a $ 300,000 mortgage balance and are refinancing a new 30-year loan, lowering your interest rate from 3.75% to 3.25% will save you about $ 84 per month or $ 1008 per year. If you can lower your rate by 1%, from 3.75% to 2.75%, your monthly savings are $ 165 per month or $ 1980 per year.

Of course, you don’t need to refinance another 30 year loan. If your finances have improved and you can afford higher monthly payments, you can refinance your 30-year loan into a 15-year fixed rate mortgage, which will allow you to pay off the loan faster and also pay less interest.

However, estimating your monthly savings is only one part of the refi equation. You also need to take into account the cost of transitioning from the loan and the time it takes you to recover those costs, or break even.

As with a purchase loan, you will have to pay the final refinancing costs. These costs may include filing and filing fees, evaluation and inspection costs, and title search fees. In general, closing costs can range from 3% to 6% of the total amount of the refinanced loan.

You can determine your break-even point by dividing the total cost of closing a trade by the amount you will save each month. As a result, you will get the number of months it will take to recoup your refinancing costs and start saving money. The less time it takes to break even, the more sense it will make to refinance your home loan.

The last piece of the refinancing conundrum is balancing the refinancing goals with the change in the length of the loan. For example, if you have a 10 year 30 year mortgage, refinancing into another 30 year loan means you will be paying the mortgage for 40 years instead of 30.

If your main reason is to cut your monthly payment, it makes sense to refinance into another 30 mortgage loan. However, if your goal is to save on interest and shorten the loan term, then refinancing a 30-year mortgage with a 15-year mortgage may be the best option if you can afford higher monthly payments. Use mortgage refinancing calculator to see what might work for you.

Are mortgage refinancing rates still low?

When the COVID-19 pandemic first hit last March, the Federal Reserve developed monetary policy to help stabilize financial markets and mitigate the economic impact of the virus. Part of that policy was to cut the federal funds rate – the interest rates banks charge each other for short-term loans – to almost zero.

The Fed also pledged to buy $ 40 billion in mortgage-backed securities and $ 80 billion in Treasury bonds and other financial instruments a month to inject money into the economy and stimulate investment and lending.

As a result, the yield on 10-year Treasury bonds fell below 1%, which put more downward pressure on interest rates and, in particular, mortgage rates. Mortgage rates are pegged to 10-year Treasuries, with loan rates an average of about 1.8 percentage points higher than yields. The lower the yield, the lower the interest rate.

The net effect of this policy was a decrease in mortgage rates, with the average rate in 30 years falling below 3% for the first time in history on July 16, 2020. Rates hit a record low of 2.65% on January 7, 2020. this year.

Rates have since risen, briefly exceeding 3% in March and April, before falling back below 3% to the current average of 2.86%.

Treasury yields also bounced back, climbing from an all-time low of 0.48% at the start of the pandemic to an average of 1.3% to 1.5%. However, both yields and rates appear to have plateaued with very little sustained upward or downward movement.

However, if you are considering refinancing, it may be better to act sooner rather than later. Economists agree that mortgage rates will begin to rise, most likely sometime in the third quarter, and rates will be around 3.5% by the end of the year.

How to know when to refinance your mortgage

Here are a few key points to consider when deciding whether to refinance your mortgage:

  • Your credit score. Most mortgage lenders will need you credit rating at least 620 to qualify for mortgage refinancing. You will need 740 to get the lowest mortgage rate. Also keep in mind that if your loan is lower than it was when you took out your current mortgage, you cannot qualify for the best rate you used to.
  • Your debt-to-income ratio (DTI). For conventional loans, some lenders will work with DTI up to 43%. FHA loans will be slightly higher, usually assuming 50% DTI. However, the lower the better.
  • How long do you stay… When refinancing, you will need to pay the closing costs. If you are planning to move soon, you may not be paying off.
  • How much equity do you have in your home. To be eligible for a mortgage refinance, you usually need at least 20% of the home equity in your home.

Don’t try to time the market. Waiting for rate fluctuations is just as troublesome as timing in the stock market. Don’t wait to see what happens to mortgage rates tomorrow if you can save money or get closer to your financial goals by refinancing today.

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Frequently Asked Questions About Refinancing Mortgages

Are refinancing rates going down?

While current mortgage rates stay low, most mortgage experts Rates are expected to rise in the coming months and years. The Federal Reserve is now saying it will likely start raising interest rates in 2023. The Fed does not set rates on mortgages, but lenders tend to raise the price of borrowing money when the Fed is in effect.

Why is refinancing a bad idea?

Refinancing is a bad idea if it doesn’t provide any benefit, be it lower monthly payments or savings on interest by shortening your loan term. If the offered interest rate is at least 0.5% below your current rate, it probably isn’t worth the cost of refinancing. Another reason not to refinance is if you plan to sell your home before you break even, or if the new monthly payment is more than you can afford.

Is it cheaper to refinance with my current lender?

Not necessary. Having an established relationship with your current creditor may result in better rates, this is not a guarantee. The best way to find the best mortgage rate is to look at different types of lenders, including banks, mortgage brokers, private lenders, and credit unions.

How can I get the best refinancing rate for my loan?

Try to get through pre-approval of a mortgage contact at least three lenders to find out your real rate and make sure you are getting the best deal. Freddie Mac found that borrowers save an average of $ 1,500 over the life of the loan with one additional rate, and an average of about $ 3,000 if they receive five offers.

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