As interest rates have fallen, refinancing may or may not be possible. Here’s what you need to know before you decide.
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Mortgage rates have fallen dramatically in recent months, and that means one thing for those who have bought a home in the past few years: It may be time to refinance.
Mortgage refinancing means replacing your current interest rate with a new one. This is usually done if rates have dropped significantly since you took out the home loan or refinanced. At average level for a 30-year fixed rate mortgage is now just above 6%, down a full point from where it was in May.
Most homeowners don’t feel the need to do anything. almost 60% from America with mortgages have rates below 4%. But if you bought recently at a higher rate, you can now significantly lower your monthly payments.
Even small changes in rates can make a big difference, said Rohit Chopra, director of the Consumer Financial Protection Bureau, a US government agency. “Now that the rates have come down, we think that millions of people could save money every month if they could pay back,” he said.
For example, on a $500,000 mortgage, you’ll save $329 in monthly payments at 6% instead of a 7% rate.
Interested in seeing if you can save money on your mortgage? Here’s what you need to know about refinancing — and how to think about timing.
Learn how much you can save
The first step is to do some research online to get a rough idea of ​​how a lower rate might change your monthly payment. You may also want to:
- Calculate your refinance rate. Websites like Bankrate, Nerdwallet and Rocket Mortgage have pages where you can enter basic data like your zip code, credit score range and how much you owe, and they’ll pull up sample refinance rates from various lenders. This will give you a more specific idea of ​​the type of rate you can get.
- Calculate your break-even point. Plug your rate into an online refinance calculator to find out your break-even point: how long you have to own your home before savings of refinancing beyond cost from refinancing. If you are planning to sell your home, it may not make sense to reinvest.
Refinancing costs money: expect to pay several thousand dollars in closing costs, just like you do when you buy a home. Benjamin Balser, a mortgage broker in Alexandria, Va., said the cost of refinancing for a typical house in Washington, DC, tends to start at about $2,000, while in Virginia, more than $3,000.
Please note that this online calculator only provides estimates. For get the results that suit you, you need to contact several mortgage brokers and loan officers. Which brings us to the next step.
Shop around for the best rates
When you repay, you can stay with your current lender or switch to a new one. The new lender pays off the old mortgage while you take out the new loan.
To get the best rates, shop for quotes. Ask friends, co-workers and neighbors to connect you to lenders and get rates.
Getting the best rate is partly a numbers game, says Sam Khater, chief economist at Freddie Mac.
“Even the same borrower who applies on the same day with the same lender will get different rates – and it’s hard to know why,” he said. “You just have to make sure you get enough quotes, because one of them might be cheaper than the other.”
One possible alternative: mortgage reset
There is also an alternative to refinancing that may be available, depending on your lender: a mortgage reset. Some banks and credit unions allow you to reset your mortgage rate to the current market rate, often for a flat fee, without having to fork over a dime.
Ask your lender if this is an option, as it is not for all mortgages.
Refinancing means a new loan with new possibilities
People often refinance to lower their monthly mortgage payments. But there are other reasons you might want to skip this process.
- To move from an adjustable rate mortgage to a fixed rate mortgage. Borrowers with variable rates may want to lock in a rate they know they can manage.
- To borrow money. Some people who have built equity in their home choose to do what is called a cash-out refinance, where they take out a loan that is larger than the debt currently owed on the property. . This is commonly done to pay for home renovation projects as an alternative to using a home equity line of credit (HELOC). A cash-out refinance can also be used to pay off other debts at a higher rate. This type of refinance comes with risk. This means taking out a bigger loan, and reducing the equity in your home.
Consider the loan terms you want
Because refinancing means taking out a new loan, the terms of the loan can change.
If you have two years to pay off a 30-year mortgage, you have 28 years left. But if you take out a new 30-year loan, you’ll start the 30-year clock again. That can be a little dispiriting.
If your financial situation is good or the rates are lower, you can look at switching to a short-term loan, such as 15, 20 or 25 years. A shorter term means paying off your mortgage faster and paying less interest.
Ask potential lenders what terms they can meet, and evaluate what they will pay each month.
Know when to jump
As mortgage rates continue to rise, it can be difficult to know when to refinance. Why should you look for it if it’s clearly going to save you money? Or should you wait to see if the rate drops again?
Your decision to repay depends on your personal circumstances as a borrower, for example, how long you intend to own your home. But if the numbers work for you right now, Khater says they will.
“Rate forecasts are very difficult. There is a lot of turmoil, in the financial markets and geopolitics that could cause rates to go higher from here. From my perspective, I would take a chance and pull the trigger.
In other words, if you can save $300 a month by refinancing now, he said you might as well hedge your bets and do it. If the rate drops another full percentage point, you can always refinance again later.
And you may not realize this, but as a home owner, you are already paying for the option to refinance. It’s baked into the mortgage rate you pay – the risk is that your lender may decide to refinance your loan one day. So take advantage if you can save money.
additional resources
Freddie Mac refinancing guide
Nerdwallet refinancing guide
The audio portion of this episode was produced by Margaret Cirino. This digital story was edited by Malaka Gharib and Chris Arnold. Visual editor is Beck Harlan.
We would love to hear from you. Leave us a voicemail at 202-216-9823or email us at LifeKit@npr.org.
