With mortgage rates tumbling down in recent weeks, millions of homeowners could save more than $150 a month from refinancing. But those considering a look at reducing their monthly payment have a few questions to ask themselves before making a decision, according to local financial experts.
“Is now a good time to refinance? That’s an individual decision and there’s some outside factors to consider,” said Robert Brode, a real estate professor at College of the Canyons.
The goal in a refinancing transaction is to change an old loan for a new and better one to help homeowners’ save money or lower payments, but it comes at a cost. How long you plan on living in your house, where your credit score stands and what your financial goals look like all affect how refinancing plays out for borrowers.
Here are some factors to consider to help decide whether to jump in or wait on refinancing:
What’s the status on mortgage rates?
Mortgage applications increased by more than 5% from one week earlier, according to data from the Mortgage Bankers Association.
“The Federal Reserve cut rates as expected last week, but the bigger influence on the financial markets was the beginning of a trade war with China. The result was a sharp drop in mortgage rates, which will likely draw many refinance borrowers into the market in the coming weeks,” Mike Fratantoni, MBA senior vice president and chief economist, said in a Mortgage Bankers Association news release on the data released in August. “The 30-year fixed rate mortgage fell to its lowest level since November 2016, and the drop resulted in an almost 12 percent increase in refinance application volume, bringing the index to a reading over 2,000 – its highest over the same time period.”
The average 30-year fixed-rate mortgage reached 3.6% in mid-August this year and 3.05% for 15-year fixed-rates, according to Freddie Mac.
The refinance volume is expected to rise even higher — an indication that homeowners should “lock that rate now. The bottom line is that the best time to refinance is when rates have fallen enough for you to save money,” said Holden Lewis, mortgage expert for NerdWallet.
How does my credit profile play a role?
For those considering to jump in while rates are low, having an improved credit score since attaining the original mortgage loan will help homeowners save more monthly and break-even quicker.
“There are a number of steps to help prepare for refinancing. As with any loan, borrowers should make sure their credit scores are healthy to obtain better refinance rates,” said Cheryl Young, senior economist at Zillow.
Tip: For those with a credit score below 720, consider seeking an FHA (Federal Housing Administration) loan as they can be a better deal than private mortgage insurance or conventional loans due to requiring a lower minimum down payments and credit scores, said Lewis.
How much would you save if you refinance?
Mortgage refinancing comes with a price tag, but it’s important to add up all the costs of a refinanced loan to calculate potential savings.
Some of those costs can include an appraisal, fees for a new lender, credit check, legal documents and filings and closing costs. Even with “no closing cost” loans, borrowers could be paying fees through higher interest rates.
Homeowners should also find out how long they plan on living in the home. If the plan is to sell the property in the coming years, the loan will not be kept long enough to make it worthwhile. One might also want to consider whether there’s at least a 20% equity in the home, according to financial experts.
“Be sure your finances are in order and that you have some equity in your home. Otherwise, refinancing might cost you more than you could potentially save. Always assess the costs and benefits of refinancing,” said Young.
After obtaining an estimate on costs, find out how long it will take to recover in closing costs. For example, Lewis said, it would take 48 months to break even on $4,800 in closing costs if monthly payments decrease by $100. If you “expect to keep the home for 48 years then you’ll save but if you sell it then you’d lose (money) if you refinance.”
Mortgage refinancing is encouraged when savings are included. Low interest rates, an improved credit score and keeping a loan for longer periods are signs indicating it’s a good time to cut that monthly expense.
Connecting with a local loan professional can help ease the process for those considering to refinance, according to Nancy Starczyk, with the California Association of Realtors and chairwoman of the Santa Clarita Valley Chamber of Commerce.
“It’s important to talk to loan professionals that can give you both scenarios,” she said, “to know how much to save.”