As many people are flocking to refinance their mortgages, you may be wondering if interest rates are low enough for you to save by refinancing also. Interest rates are certainly low right now, but there are many other factors to consider as well. As lenders are experiencing an increased demand in mortgages, find out if it's worth it for you to hop on the refinancing train right now.
Refinancing a mortgage allows the borrower to replace a mortgage with a new one that has a better interest rate or terms. Refinancing is also advantageous if you’ve gained equity in your home and you are now able to refinance without private mortgage insurance. If your credit has improved since your first mortgage, then you may reap some additional benefits by refinancing. However, when you refinance you’ll have to pay closing costs again so you’ll have to calculate if it makes sense for you to refinance and how long it will take to break-even.
Current Interest Rates
Mortgage interest rates hit an all-time low in March and have been slowly coming up since then, likely due to increased demand and lender staffing issues. That being said, according to Freddie Mac average mortgage interest rates are still very low compared to the past few years. It’s expected that interest rates will remain on the low end for the rest of the year, however the main concern at this time is market volatility. Due to the pandemic, interest rates can easily rise or drop without much notice so there are certainly risks that you should be aware of. If you decide to refinance, locking in an interest rate with a lender should be a top priority after comparing a few lenders. But when deciding to refinance your mortgage, interest rates are not the only factor to consider.
The break-even point of a mortgage refinance is the amount of time it takes for the monthly savings to equal the cost of refinancing. You can use the loan estimate provided by the lender to find out the cost of refinancing.
To calculate the break-even point, you divide the total loan costs by the monthly savings. The monthly savings is the difference between your current monthly mortgage payment and the new one. For example, if your current mortgage payment is $2,000 and the new monthly payment after refinancing is $1,800, then the monthly savings is $200. If the total loan cost is $4,000 then $4,000/$200 = 20 months to break-even. If you don’t plan on staying in your home past the break-even point, then you shouldn’t refinance since that’s when you will start to save.
Keep in mind the terms of the mortgages that you are comparing. If you extend the term of your mortgage then you may have monthly savings, but that doesn’t take into account interest for the term of the loan.
If you decide to pursue refinancing your mortgage, you should reach out to several lenders and compare the interest rates and terms. Some lenders may be able to offer lower interest rates at this time than others so it’s best to comparison shop for rates. Moreover, because interest rates have been low and so many people have decided to get mortgages at this time, lenders are able to reject applicants due to their credit or the type of mortgage, like a cash-out refinance.
It’s definitely a good idea to look into refinancing your mortgage right now, but remember to calculate the break-even point and consider the terms of the loans. Be patient with the process since most lenders are overwhelmed with the high demand right now. Finally, keep in mind that it’s okay if you decide the cost is not worth refinancing.
If you’re wondering if you should pay off your mortgage early, read Should You Pay Off Your Mortgage Early?