Is now a good time to refinance your mortgage?

By Stock News On Jun 11, 2024 11 0

Deciding whether it is a good time to refinance your home seems to be a simple matter. If mortgage rates are one or two percentage points lower than your current interest rate, you have an opportunity to get a new loan, save on interest, and lower monthly payments.

If interest rates aren’t in your favor for a refinance right now, you may think you’re out of luck. But deciding if you should refinance goes well beyond just looking at interest rates. Here are several strategies that could make now a good time to refinance your mortgage.

In this article:

Your credit score could make this a good time to refinance

If you’ve been making timely payments on your mortgage, your credit score may have improved significantly since you bought your house. Check your score to see where it stands.

Then, compare your credit score range to the chart below. Each row generally represents an average change in interest rate. For example, from the bottom row to the top row represents a more than 1.5% difference in interest rate. To determine your interest rate savings from an improved credit score, locate the row of your old score, then add the interest rate savings for each row above your original score.

Let’s say your score was 620 to 639 when you bought your house, and it’s now in the 660 to 679 range. In this case, you might lower your interest rate by nearly a full point just because your credit score improved. (Calculated by adding the two rows of improvement: 0.55 + 0.43 = 0.98.)

With a 30-year mortgage for $300,000, your improved credit score might save you over $72,000 in interest over the life of the loan.

Use the FICO loan savings calculator to run the numbers on your credit score.

Yahoo Finance tip: A rising credit score usually means you’ve also been paying off debt. That will lower your debt-to-income ratio, another primary factor lenders consider. An improved DTI may help you earn an even lower interest rate on your refinance.

Shorten the loan term to make this a good time to refinance

Another reason to refinance your mortgage is to get a shorter term. Refinance your loan from 30 to 15 years, and at recent interest rates, you might save around 0.70% on your fixed-rate mortgage. (As of the beginning of June 2024, the average 30-year rate was 6.99%, and the 15-year loan rate was 6.29%, according to Freddie Mac.)

This is a long-term wealth-building strategy. As an example, on that $300,000 loan we mentioned above, your monthly mortgage payment goes up by about $600, but you pay off your home in half the time. And save over $250,000 in interest.

Dig deeper: 15-year vs. 30-year mortgage — How to decide which is better

And it doesn’t have to be from 30 years to 15. You might run the numbers on moving from a 30-year loan term to a 20-year term. Or, if you’re a FIRE (financial independence retire early) advocate, look at going from 30 to 10.

Tapping the equity in your home can be a good time to refinance

When property values increase, or you’ve been in your home long enough to gain some equity, it can be a good time to refinance.

A cash-out refinance replaces your original mortgage loan with a new one, allowing you to pocket some of your home’s value.

If current refinance rates are higher than with your existing mortgage, you might skip a cash-out refi and consider a home equity line of credit or home equity loan instead. Since HELOCs and HELs are second mortgages, you don’t lose the lower rate of your existing loan.

Dig deeper: Home equity line of credit (HELOC) vs. home equity loan

Eliminating mortgage insurance can make this a good time to refinance

If you put down less than 20% when you bought your house and got a conventional loan, you have been paying private mortgage insurance (PMI). Once you have 20% equity in your home, you should submit, in writing, a request for your lender or mortgage servicer to cancel mortgage insurance. Simple enough, right?

It should be no problem — unless the lender has been paying your mortgage insurance premiums. Some lenders may offer to pay the mortgage insurance in exchange for a slightly higher interest rate. In that case, you will need to consider a mortgage refinance to eliminate that lender-paid mortgage insurance.

You might also want to eliminate FHA mortgage insurance premiums by refinancing into a conventional mortgage.

Learn more: How to get rid of private mortgage insurance

If you have a government-backed loan, this may be a good time to refinance

FHA loans have special incentives for homeowners looking to refinance. So do VA mortgages, which are for borrowers with a military connection, and USDA loans for low-to-moderate-income borrowers buying in rural areas. All three types of government-backed mortgages offer “streamline” financing, meaning less paperwork and a faster turnaround time.

Streamline refinance programs have certain restrictions, so talk to a lender that specializes in FHA loans, VA loans, or USDA loans to find out what your options are.

Read more:

When is a good time to refinance your home?

Your particular financial situation will determine whether refinancing is suitable.

Good times to refinance a home can include:

When interest rates have fallen below your current mortgage rate enough to warrant paying the closing costs of refinancing
When your credit score has significantly improved since you closed on your home loan
When you want to shorten the loan term to save interest over the life of the loan and pay your house off sooner
When you want to eliminate lender-paid mortgage insurance
When you want to replace your current adjustable-rate mortgage with a fixed-rate loan

Learn more: Is it time to refinance your mortgage? 5 ways to prepare

Is this a good time to refinance?

Think you’re ready to refinance? Make sure it’s a good time for you to exchange your mortgage for a new one by considering these important timeframes:

The holding period of your mortgage. Some types of home loans require you to wait for a period of time before refinancing. Mortgage holding periods can vary by loan type and lender, ranging from six months to 210 days.

Learn more: How soon can you refinance a mortgage after buying a home?

What is your break-even period? According to Freddie Mac, the average cost of a refinance is around $5,000. When you are ready to explore a refinance, determine how much it will cost you and then calculate your break-even period.

Here’s how: Take your total closing costs and divide them by the monthly savings gained by refinancing to a lower mortgage payment. For example, if you save $250 a month on your payment and pay $5,000 in closing costs, it will take 20 months to break even (5000 / 250 = 20).

When do you think you might want to move again? The timing of your next move plays a big role in the viability of a refinance. You certainly don’t want to refinance if you’ll be relocating before the end of your break-even period.

Is this a good time to consider an adjustable-rate mortgage? You likely wouldn’t want an ARM when interest rates are heading higher. However, monetary policy experts believe that we are near, or at the top, of the current interest rate cycle. If that’s true, this might be an opportune time to consider refinancing to an adjustable-rate mortgage. Then, when it’s time for your mortgage rate to change with an ARM, it will likely decrease.

Is this a good time for you financially? This requires a review of your personal finances, your long-term financial goals, and quality-of-life decisions. Do you have a good job, aren’t looking to relocate soon, and have a good refinance strategy in mind? It might be time to replace your current loan.

Is it a good time to refinance? FAQs

At what point is it not worth it to refinance?

If the interest rate improvement is not significant enough to justify refinancing costs, it’s probably not worth it. A refi can also be a waste of time and money if you move before you hit the break-even point on closing costs.

How low will mortgage rates go in 2024?

In the first six months of 2024, 30-year mortgage rates have not gone below 6.5%. In fact, they’ve hovered between the mid- and upper-sixes to the low 7% range. Even though the Federal Reserve has signaled that we are nearing peak interest rates with an intent to lower rates as its next move, it’s unlikely that mortgage rates will sink dramatically. However, homebuyers who borrowed in the 7.5% range in October and November of 2023 might see an opportunity for a one-point improvement in 2025.

Will mortgage rates ever drop to 3% again?

Forecasters never say never, but with an average mortgage rate of 7.73% over 50-plus years, it’s hard to imagine rates going that low again anytime soon.

This article was edited by Laura Grace Tarpley

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