Despite a recent uptick in rates, it still pays for a lot of
people to refinance.
During the second part of 2020 and early 2021, mortgage
refinance rates were sitting at or near record lows. But over the past month,
those rates have climbed, making refinancing a less appealing prospect.
Yet Black Knight, a mortgage analytics company, estimates
there are still 11.1 million high-quality refinance candidates who could save a
lot of money by swapping their existing mortgages for new ones with better
terms. The question is, are you one of them?
How to know if you're a strong refinance candidate
Refinancing your mortgage could leave you with a much lower
monthly payment than what you're on the hook for now. That could, in turn, help
you boost your savings or make it easier to cover other bills.
So how do you know if it makes sense for you to refinance?
Basically, you'll need to answer these questions.
Do I have a good credit score?
To qualify for a very competitive rate on a mortgage
refinance, you'll generally need a credit score in the mid-700s or above. You
can still be eligible to refinance if your score is in the upper 600s or low
700s. But if you want to get the lowest rates available today, you'll need to
show refinance lenders you're a candidate with really strong credit. And if
that's not the case, or your credit score is poor, it may not make sense to
refinance right now (though it could pay to refinance once your credit score
improves).
Can I shave roughly 1% (or more) off of my existing interest
rate?
A general rule of thumb is that refinancing is worthwhile if
you can lower your rate by at least 1%. Refinance rates fluctuate from day to
day, but as of this writing, the average refinance rate for a 30-year fixed
mortgage is 3.4%. If your existing mortgage has a 4.5% interest rate, then
refinancing could make a lot of sense. But if you're currently paying 3.6%,
you'll probably want to skip a refinance right now.
It's also worth noting that it's possible to snag a lower
interest rate by getting a shorter loan term. The average 15-year refinance
rate, for example, is 2.69% right now. But shortening your repayment period
will likely result in a higher monthly payment, and that could hurt your
finances rather than help them.
Am I planning to stay in my home for at least a few years?
When you refinance a mortgage, you're charged closing costs
that typically range from 2% to 6% of your loan amount. You'll need to make
sure you plan to stay in your home long enough to break even on those fees and
come out ahead via monthly savings on your mortgage payments. So, say you're
charged $6,000 to refinance, but doing so lowers your monthly payments by $250.
That means it'll take two years to break even, and after that is when you'll
actually start to save money. If you think you might move within the next 18
months, refinancing won't be worth it.
Though refinance rates may not be quite as attractive as
they were in late 2020 or early 2021, they're still pretty competitive on a
historic basis. It's a good idea to think about whether refinancing makes sense
for you, because it could end up making your home a lot more affordable to pay
off.
A historic opportunity to potentially save thousands on
your mortgage
Chances are, interest rates won't stay put at multi-decade
lows for much longer. That's why taking action today is crucial, whether you're
wanting to refinance and cut your mortgage payment or you're ready to pull the
trigger on a new home purchase.
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