It Might Be Time to Refinance Your Mortgage
Mortgage rates fell to their lowest since May 2023, averaging 6.59 percent, according to a Bankrate survey . When rates drop, it opens up new opportunities not only for first-time homebuyers, but also for current homeowners. For many, it’s time to consider a strategy that has been largely dormant in recent years: mortgage refinancing.
What is mortgage refinancing?
Mortgage refinancing is the process of replacing an existing mortgage with a new one, usually to secure better terms or lower interest rates. This could potentially lower your monthly payments, shorten the term of your loan, or allow you to tap into the equity in your home.
Deciding to refinance your mortgage
Reduced rates are one thing; The reality of refinancing is different. Let’s take a look at some key pros and cons of refinancing your mortgage.
Pros of refinancing
-
Lower monthly payments: A lower interest rate can significantly lower your monthly mortgage costs.
-
Shorter loan term: You can switch from a 30-year to a 15-year mortgage without a dramatic increase in your monthly payment.
-
Cash Out Option: Refinancing can allow you to access the equity in your home to cover major expenses or consolidate debt.
Cons of refinancing
-
Closing Costs: Refinancing is not free. You will need to pay closing costs, which typically range from 2% to 5% of the loan amount.
-
Long-term costs: Although your monthly payments may decrease, you may end up paying more over the life of your loan if you extend the term.
-
Potential prepayment penalties: Some mortgages have penalties for prepaying your loan early.
Is now the right time for you?
If your current rate is significantly higher than the new rates available, you may want to consider refinancing. You should also plan to stay in your home long enough to recoup the closing costs. Another encouraging sign could be an improvement in your credit score after you get your initial mortgage, potentially qualifying you for higher rates. If you want to switch from an adjustable rate mortgage to a fixed rate loan, you’ll get more stability. Ultimately, it will be a numbers game. Use Bankrate’s mortgage refinance calculator to see if refinancing makes sense.
Tips for getting the best refinance rate
Refinancing your mortgage could potentially save you thousands of dollars over the life of your loan, that is, if you can secure a lower interest rate . Here are some tips to improve your chances.
-
Improve your credit score: A higher credit score may qualify you for higher rates. Pay off your debts and correct any errors on your credit report. Here are more of our tips for improving your credit score to put you in the best possible credit position.
-
Shop around: Don’t settle for the first offer. Compare rates from multiple lenders to find the best deal. Check out these tips for shopping lenders the same way you would research a restaurant, especially if you want the best chance of ordering something you’ll like.
-
Consider paying points or prepaying closing costs: Paying more upfront can sometimes get you a lower interest rate, saving you money in the long run. Some lenders offer “no closing costs” refinancing, in which they cover the fee in exchange for charging you a higher interest rate over the life of the loan. To get the lowest rate, decide to pay all closing costs out of pocket. Closing costs are typically 2-5% of the loan amount.
-
Act quickly: Although rates have dropped, there is no guarantee they will remain low. If refinancing makes sense for you, don’t delay.
The big picture
This drop in mortgage rates comes after a period of significant increases, with rates peaking at 8 percent at the end of 2023. The current average of 6.59 percent represents a marked improvement, especially for those who financed when rates were rising.
However, it is important to remember that these rates are still higher than the record lows seen during the pandemic, when rates hovered around three percent. This means that while refinancing may not make sense for everyone, it may be especially beneficial for homeowners who took out mortgages during the recent rate hike.
As with any major financial decision, it is wise to consult with a financial advisor or mortgage professional to determine whether refinancing fits your long-term financial goals. They can help you calculate potential savings and your break-even point, ensuring that refinancing is truly in your best interest.
While the current drop in mortgage rates may not be a return to the ultra-low rates of the pandemic era, it does represent a significant opportunity for many homeowners. By carefully considering your individual circumstances and following the advice outlined above, you can take advantage of this shift in the market.