Should I refinance my mortgage now?

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Refinancing when mortgage rates are at historic lows could help you get a lower rate and reduce the amount of interest you pay over the life of your loan. Here’s what to keep in mind when considering refinancing. (Stock)

When interest rates drop, deciding whether or not to refinance your mortgage is often an easy decision. But in a rising rate environment, you might be wondering, “Should I refinance my mortgage now or wait for rates to drop again?”

The answer largely depends on your situation. Before refinancing your mortgage, you should consider a few factors.

Credible allows you compare mortgage refinance rates from various lenders in minutes.

Is it the right time to refinance?

In general, a mortgage refinance is a smart move if it saves you money. You should consider this strategy if it can reduce your interest rate by at least 1%.

Let’s say you’re five years from now with a 30-year mortgage of $250,000 with a fixed mortgage rate of 4.25% and a monthly payment of $1,229.85. By refinancing a new 30-year loan with a rate of 3.25%, you can reduce your payment by more than $241, which would save you more than $11,003 over the life of the loan.

You can use Credible mortgage refinance calculator to help you understand how refinancing might affect your monthly payment.

Why should I refinance?

When you refinance, you may be able to save on interest, pay off your home loan sooner, switch to another type of loan, or tap into your home equity. It is important to determine your main objectives before applying.

Save on interest

If you qualify for a lower interest rate, you can save on interest and lower your monthly mortgage payment at the same time. Before refinancingdo the math to determine the interest charges on your current loan and on the new mortgage.

Pay off your loan sooner

By refinancing a shorter-term loan, you can own your home for free and faster. Paying off your mortgage frees you up to focus on other financial goals, like retirement or saving for education. Although your monthly payments are likely going up because you’re paying off your debts sooner, you can save a significant amount on long-term interest.

Switch to another type of loan

You can also refinance an adjustable rate mortgage (ARM) into a fixed rate loan, or vice versa. If you refinance with a fixed rate loan, you won’t have to worry about interest rate hikes, which can make it easier to budget for your payments.

On the other hand, switching from a fixed-rate loan to an ARM may be worth it if rates drop and you don’t expect to be home long.

SHOULD I REFINANCE MY ADJUSTABLE RATE MORTGAGE NOW?

Tap into your home equity

Through a cash refinance, you can tap into the equity in your home, just like you would with a home equity loan or a home equity line of credit (HELOC). With a cash-out refinance, you take out a new mortgage for more than your current balance and pocket the difference. Although you have a larger mortgage balance, you can use the excess money for things like home renovations or student loan debt.

Whether you’re looking for a rate for a cash-out refinance or a traditional refinance, Credible is here to help. With Credible, you can easily compare refinance options from various lenders.

How much does refinancing cost?

Refinancing will cost you money. But depending on your situation, it may be worth it. If you choose to refinance, you’ll have to pay closing costs, which include fees for processing your loan, completing a home appraisal, and more. Closing costs will likely cost you between 2% and 5% of the total loan amount.

Here is an overview of the fees you can expect when refinancing:

  • Loan origination fees — The origination fee is designed to cover the costs of processing, underwriting and closing your mortgage. You will usually pay between 0.5% and 1.5% of the total loan amount.
  • Assessment fees — You will need a home appraisal to determine the value of your property. Appraisals generally range from $300 to $500.
  • Title insurance fees — This fee applies to a new title insurance policy, which you will need to purchase if you refinance. The average cost is $1,000, but will depend on your location and loan amount.
  • Credit application fees — Lenders will pull your credit to see how risky it is to lend to you. Credit report fees are usually less than $30. Some lenders may waive these fees.
  • Prepaid interest charges — Your lender may ask you to prepay the first month’s interest when you take out your new mortgage. The timing of your closing and the interest rate will determine how much you will pay.
  • Registration fees — The registration fee, which varies by location, covers the cost of registering your home in its county.
  • Mortgage points — In some cases, you will have to pay “extra points” to get a lower interest rate. One point equals 1% of the loan amount, so if you have a $400,000 mortgage, one point would be $4,000.

Some lenders also offer no-closing-cost refinance loans to those with outstanding mortgages. This is when the lender rolls closing costs into your mortgage amount, allowing you to pay them over time rather than up front.

How to Know When You’ll Break Even

The break-even point will tell you how long it will take to recover your refinance costs. To calculate it, divide the amount of your closing costs by your monthly savings.

For example, suppose your monthly payment decreases by $241. It would take you about 21 months to break even with $5,000 in closing costs. If you’re thinking of selling your home and moving out before you break even, refinancing may not be worth it.

HOW TO REFINANCE YOUR MORTGAGE AND SAVE BIG

How long does it take to refinance?

Although a mortgage refinance typically takes 30-45 days, the process can be longer or shorter depending on your property, the complexity of your finances and the current market. To make sure you don’t miss out on a good mortgage rate, you can lock in your rate for a set period of time, around 30 to 60 days.

When should I refinance?

In the following situations, refinancing your mortgage is probably worth your time and money:

Your credit score increases

A higher credit score tells the lender that you are a responsible borrower and opens the door to lower interest rates. If your score has gone up since you first took out your mortgage, you can potentially save hundreds or even thousands of dollars in interest by refinancing at a lower rate.

WHEN IS THE RIGHT TIME TO REFINANCE MY MORTGAGE?

You can get a lower interest rate

A higher interest rate will increase the overall cost of your mortgage. If you’re able to lock in a lower rate because your credit score has gone up or mortgage refinance rates have dropped, you’re probably a good candidate for a mortgage refinance. With a lower interest rate, you can reduce your monthly payments and the total amount of interest you pay over the term of your loan.

Your ARM is about to reset

With an ARM, you’ll lock in a low, fixed interest rate for a set period of time. At the end of this period, the rate will reset to the prevailing interest rate, which may be higher.

It’s a good idea to refinance your variable rate mortgage before it’s reset to a new rate, especially if you know the new rate will be significantly higher and impact your monthly budget. You may also want to refinance if you prefer the stability of a mortgage payment that doesn’t change.

If you’ve decided it’s a good time to refinance, spend a few minutes comparing lenders and rates at Credible. You can speak to a mortgage expert to review your options.

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