Mortgage Refinance Demand Rises 20%: Should You Get a New Home Loan?
Image source: Getty Images
Homeowners are asking for refinancing. Should we do the same?
Although mortgage refinancing rate have remained competitive in 2021, they have recently started to climb. And that may scare off some existing borrowers. This could explain why mortgage refinancing requests recently increased by 20%, according to the Mortgage Bankers Association. This activity takes place despite a recent implementation 0.5% refinancing fee for loans signed on December 1, 2020 or later.
If you’re thinking about refinancing your mortgage, you might want to jump on the bandwagon before rates go up even more. But is now the right time for you to refinance? Ask yourself these questions to find out.
How much can I lower my current rate?
Mortgage refinancing rates today are still extremely competitive, despite a recent hike. But unless you can lower your mortgage interest rate by around 1% or more, refinancing may not make sense because of the costs involved.
As of this writing, the average refinance rate for a 30-year mortgage is 2.91%. If you’re currently paying 4.5% on your mortgage, refinancing could dramatically reduce your monthly payments and save you a lot of money on interest. But if you’re currently paying 3.5%, refinancing may not make much sense.
How long do I plan to stay at home?
When you refinance a mortgage, there is closing costs you will pay to finalize your loan (just like there are closing costs with a purchase mortgage). These are usually 2-5% of your loan amount, and they will unfortunately eat away at your savings for a while. In fact, you won’t really start saving money with refinancing until you break even on your closing costs. So to that end, you will need to make sure that you plan to stay in your home long enough that the refinancing is worth it.
Suppose it costs you $ 6,000 to refinance, and in doing so, you reduce your monthly loan payments by $ 200. This means that you envision 30 months to break even, and then on the 31st month you will start enjoying savings – and you will continue to do so from then on. If you are certain that you will not be moving for at least five years, then refinancing makes sense. But if you plan to move within two years, you better not refinance.
Am I a strong enough candidate to land a good rate?
Being a current owner doesn’t automatically make you a trustworthy borrower. When you apply for mortgage refinance, you should follow the same steps as when you applied for a loan to buy your home. Specifically, you will need to show mortgage lenders that you have a strong credit rating, a reasonable amount of existing debt, and a stable source of income strong enough to cover your outstanding mortgage payments.
Before you apply for refinancing, make sure you can tick all of these boxes. If you can’t – say, you recently took out a huge loan or fell behind on bills last year and your credit score took a hit – then it’s worth the wait to refinance. Even if you are approved for refinancing, you probably won’t get much on your interest rate if you’re not a good candidate.
What’s the right move for you?
While there are many great reasons to refinance today, it is not necessarily the best decision. Think about your personal situation before you start applying for a new home loan. And remember, while refinance rates may go up a bit this year, they are likely to remain extremely competitive. So don’t assume you’ll lose a lot if refinancing later in the year makes more sense to you.
A historic opportunity to potentially save thousands on your mortgage
There is a good chance that interest rates will not stay at multi-decade lows any longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger to buy a new home.
Our expert recommends this company to find a low rate – and in fact he used them himself for refi (twice!). Click here to find out more and see your rate. While this does not influence our opinions on the products, we do receive compensation from partners whose offers appear here. We are by your side, always. See our full advertiser disclosure here.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We strongly believe in the Golden Rule, which is why the editorial opinions are our own and have not been previously reviewed, endorsed or endorsed by the advertisers included. The Ascent does not cover all the offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.