With rates still near historic lows in 2020 and early 2021, mortgage lenders have seen applications for mortgage refinances at all time highs. While many borrowers with rates north of 3.5% took advantage, many borrowers with 3.0-3.5% rates were on the fence, waiting to see if rates moved lower to make their decision to refinance easier and more meaningful to their monthly budget.
So how do you know when refinancing is the right move? There can be a few moving pieces to that determination and everyone has a different circumstance, but this article will provide some things to consider to help you make the best financial decision regarding your mortgage.
No Closing Costs Refinances
If you can find a lender that offers you a no closing cost refinance, you will probably want to consider it. Even a slight reduction in the interest rate will benefit you if the costs are truly zero. Don’t confuse zero out of pocket money with no closing costs. Rolling in the costs to the loan is not a no closing cost refinance. You will want to make sure the lender is covering all costs.
Be sure to read our article on No Closing Cost refinances to understand all of the details.
Market rates are at least .5% below your current rate
When rates are at least a half of a percent below your current rate, it’s a good time to start to think about refinancing. You will really need to consider the closing costs to determine if it makes sense. Our article on Mortgage Interest Rate Basics will give you a better understanding of how loans are priced to consumers and how “points” play a big factor in finding the right interest rate for you.
You must consider the savings vs. the overall cost of the transaction and calculate a breakeven point in order to determine whether a refinance makes sense or not. For example, if you can save $50 per month with a .5% drop in interest rate and the closing costs are $1000, your breakeven point is 20 months ($1000 cost/$50 monthly savings). If you plan to be in the home and keep the mortgage for 5+ years, then a refinance probably makes sense. But if the costs are higher causing your breakeven point to be further in the future, then it’s probably best to wait to see if rates drop further.
Tapping into your home’s equity
If you have significant equity in your home and you find yourself in need of cash or want to payoff higher interest debt, a cash out refinance can be a great tool to borrow money at reasonable low fixed rates. Cash out refinances typically carry slightly higher rates than traditional refinances, but they certainly beat the alternatives of credit cards or higher rate unsecured loans.
You will want to consider your current rate when determining if a cash out refinance makes sense. Typically, if you can lower the rate on your current balance(s) and/or borrow the additional cash needed at a lower cost than other methods, then a cash out refinance will make sense for you.
Start Your Mortgage Calculations with Local Mortgage
If you are on the fence about refinancing and would like to discuss your particular situation, feel free to contact a Local Mortgage Loan Officer. Our team of experts is here to help you through the process and help you determine if a refinance is right for you.