Refinancing your mortgage is one way to reduce your monthly mortgage payments if you can get a lower interest rate than your current home loan. But with rampant inflation and the Fed’s plan to keep raising the federal funds rate , does it make sense to refinance now?
While higher mortgage and refinancing rates can add thousands of dollars in interest to your mortgage process, it’s not Must mean now is a bad time to refinance . The decision to refinance depends on your personal financial situation and whether it makes financial sense to replace your mortgage with a new home loan. If today’s interest rate is higher than your current mortgage rate, it probably doesn’t make sense for you.
“Mortgage rates have risen sharply this year,” said Dave Steinmetz, president of ServiceLink’s Originating Services division. “Rising rates can be attributed to Fed actions driven by a number of factors, most notably, the need to contain inflation.”
Here’s everything you need to know about refinancing rates information and how they work.
What is refinancing?
When you refinance your mortgage , you pay off your existing mortgage with the new rate and terms . If you took out an existing mortgage at a higher interest rate than you are now, refinancing at a lower rate could save you money on your monthly payments, or allow you to pay off the loan faster (sometimes both and there is).
Reasons to consider refinancing
There are many valid reasons to refinance. Some of the most common situations include:
- Reducing your Monthly repayments : Switching to a new loan with a lower interest rate can reduce your monthly mortgage payments. The amount you save each month depends on the size of your mortgage and how much lower the new interest rate is compared to your previous loan. You can use the loan calculator to estimate your new monthly payment. Pay off the mortgage as soon as possible : If your original mortgage was a 30-year loan, you can refinance to pay off faster. With a lower interest rate, you can switch to a 15-year loan and still have manageable monthly repayments. Reducing the term of your mortgage also reduces the total amount of interest you pay over the life of the loan. Withdraw cash from home
: With cash refinancing, you apply for a new loan more than you owe on your old loan – and pay the difference as cash. Many homeowners use cash refinancing to pay for home improvements. Converted to Fixed Rate Loan : If you have an adjustable-rate mortgage, switching to a fixed-rate loan might be a good move. Refinancing can help you reduce future risk, says Jason Fink, a professor of finance at James Madison University in Harrisonburg, Virginia. Locking in a fixed rate provides both predictability and prevents future rate increases. Cancellation of Private Mortgage Insurance : Most loans require private mortgage insurance if you are buying your home with less than a 20% down payment. Since home prices have risen in many areas, you may have recently crossed the 20% equity threshold, creating an opportunity for you to refinance without PMI, which could further reduce your monthly payment.
When refinancing doesn’t make sense
Lowering monthly mortgage payments at the same time sounds tempting, but refinancing isn’t always a smart financial move.
While refinancing can save you money, it can also come with high upfront costs. Because a refinance loan is a new home loan, you’ll have to pay closing fees just like the original mortgage. These fees are between 3% and 6% of the loan amount – for example, for a $300,000 refinance, the fees are between $9,000 and $18,000.
Refinancing may have fixed or variable costs, depending on the size of your loan. But it’s still worthwhile to refinance — even if you have a large loan balance — because lowering rates can save you tens of thousands of dollars in interest in the long run.
Keep in mind that it may take several years to recoup your refinancing costs. If you anticipate moving in a few years, the hassle and expense of refinancing now may not make sense.
Refinancing may also not be worth the time if you own your home for a long time. Mortgages are designed so that you pay the highest interest in the early years. The longer you have a mortgage, the more you will pay each month to repay the principal. If you refinance later in the loan term, you’ll revert to paying primarily interest rather than building equity.
What factors determine my refinance rate?
Several factors determine the refinance rate you will pay. One of the most important factors is your credit score; someone with a lower credit score may pay a higher interest rate than someone with a higher credit score.
The term of the loan will also affect your refinance rate. Interest rates on 30-year notes will be higher than on 15-year mortgages. Fink recommends finding a lender that offers a “floating rate” clause, which can help you take advantage of subsequent rate drops — even after you’ve locked in.
For example, if your rate is locked for 30 days and the rate drops during that time period, you will be able to lock in a lower rate. The floating option will cost you – usually 0.5% to 1% of the loan amount – but it can save you money if interest rates drop.
“You usually have to choose a lower rate, so be sure to keep an eye out for daily rate changes,” Fink said.
Current Mortgage and Refinance Rates
We use information collected by Bankrate, which is owned by the same parent company as CNET , to track daily mortgage rate trends. The table above summarizes the average interest rates offered by lenders across the country.
How much credit score do I need to refinance?
Your credit score will be a factor in your choice of refinancing, as will the type of home loan you pursue. For example, conventional loans typically require a credit score of 620 or higher.
You may be eligible for Federal However, Housing Authority Refinance has a credit score of 580. If you already have an FHA mortgage, you may be eligible for simplified refinancing that requires less credit documentation.
If you’re looking to refinance to lock in a lower interest rate, a high credit score will put you in a better position. Generally, the higher your credit score, the lower your rates. If your credit rating is too low, consider delaying your refinancing application while working to improve your credit score.
You can improve your score by:
- Pay your debts on time : Know any payments you owe and make a plan to pay all your bills time. Make sure you’ll never be late on a credit card or loan again with automatic payments. Limit your purchases on your credit card: Lenders expect you to use no more than 30% of your available credit limit, so don’t max out any credit limit on your card. Pay any balance below 30% of your credit limit.
- Fix any errors in the credit report : Contact the credit bureau for incorrect information, such as debts you have paid but listed as outstanding. The bureau must correct erroneous entries in your report, but cannot eliminate accurate negative entries.
Comparative refinancing rates
Before refinancing your home loan, it’s a good idea to shop around and research different mortgage lenders. Make sure you understand all the upfront costs and use a mortgage calculator to help you figure out how much you’ll need to pay when you close. If you want to maximize your savings, it’s also important to calculate how much you can save by refinancing to a shorter loan term.