Two things you should know about refinancing now
When mortgage rates drop, homeowners typically wonder: Is now a
good time to refinance my house?
The short answer is probably ‘yes’ — especially if you keep
these two things in mind when deciding whether to refinance:
- Getting approved for a mortgage is simpler and faster than it used to be, so it’s likely the refinance process will feel smooth and easy compared to your original mortgage application
- In general, you should refinance if it will save you money — and with current interest rates at historic lows, there’s a good chance it will
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Why now is a good time to refinance
For many homeowners, now is a great time to refinance. Today’s mortgage rates are still near record lows, creating opportunities for millions of homeowners to save on their monthly payments.
Consider that dropping
your rate by just 1.0% puts about ten percent of your mortgage payment back
into your pocket each month.
That means for every $1,000
you pay to your lender today, you could reduce your payment by $100.
That’s $12,000 saved over the
next 10 years — simply by doing a refinance.
And low mortgage rates aren’t the
only thing U.S. homeowners have going for them.
Dropping your mortgage rate by just 1% could save you $12,000 over the next 10 years.
It’s also good news for
homeowners who made a small down payment a few years ago.
If your home’s value has increased while you’ve been paying down your loan balance, you might have enough equity to cancel mortgage insurance and save a few hundred dollars each month.
Of course, refinancing isn’t a
free ride. There are closing costs to pay, and you need to consider the
long-term cost of starting a brand new loan.
That’s why it’s important to
check your own rates and see how much you could save.
Refinance rates vary by borrower
and by company, so get quotes from a few different lenders to see how a
refinance could benefit you.
Refinancing during coronavirus
The coronavirus pandemic has made it both easier and harder to
refinance your home.
On one hand, COVID is the main reason for ultra-low mortgage rates.
The pandemic has pulled the economy down, and a poor economy typically means
lower interest rates for borrowers.
As long as COVID case numbers and unemployment are high, the
low-rate trend likely won’t change. And even after the U.S. sees a meaningful
drop in cases, the economy could take years to fully recover.
That means mortgage interest rates should stay low for the next year
or longer, making it a good time to refinance throughout 2021.
But there’s a catch. Unless you are eligible for a Streamline Refinance, you may not qualify for a refinance unless you’re in a financially stable position. And COVID has weakened many Americans’ financial standing.
To qualify for a new mortgage — and a low rate — you need decent
credit and stable income that’s expected to continue at least 3 years into the
Homeowners who have lost their job or seen a substantial income
reduction due to the pandemic might not qualify to refinance right now.
If you find yourself in this situation, don’t lose heart. Historically low rates are here to stay for the time being. And it may be easier than you think to refinance after being unemployed.
Be patient, and make sure you keep an eye on your credit so you’re in a good position to refinance when your job stability improves.
There’s no simple answer to the
question “is refinancing worth it.” That’s because ‘worth it’ can mean
something different for each homeowner.
For one person, refinancing for a
lower monthly payment might be worth it — even if it increases their total interest
cost. For another person, refinancing into a higher monthly payment
might be worth it — if it helps them pay off their mortgage faster.
So it doesn’t always make sense
to follow conventional wisdom about refinancing.
Common advice like “you need to
lower your interest rate by 1% or more,” might not actually apply in your
Here are two of the most
commonly-held beliefs about refinancing — and why they’re often wrong.
Myth 1: You need to drop your
mortgage rate by 1%
The “saving one percent”
argument is a holdover from the 1950s when closing costs were big, loan sizes
were small, and homeowners lived in homes for many decades.
Back then, when loan sizes
were typically less than $60,000, a homeowner had to lower their mortgage interest rate at
least one percent to save $1,000 annually.
At today’s loan sizes, the
typical refinancing homeowner can save six times that amount.
Even a modest mortgage rate reduction can result in substantial monthly savings. So long as costs are held low, even a 0.25% rate reduction can be worthwhile.
If you’re considering a
refinance, don’t look at your new interest rate in a vacuum. Consider how much
you’ll save each month, how much you’ll save over the loan’s term, and how much
you need to pay in closing costs to get that new rate.
Looking at the full picture will
give you a much better idea of whether refinancing is worth it than looking at
interest rates alone.
Myth 2: You need to ‘break even’
on your refinance
reason homeowners pass on a refinance is that they think they’ll never recoup
This is based on an approach
known as the “break-even method,” which states your savings need to ‘break
even’ with the amount you spend on closing costs.
For instance, if your refinance
costs $5,000 and saves you $200 per month, it would take 25 months for your
savings to balance out your closing costs.
According to the break-even
method, you wouldn’t start seeing ‘real savings’ on the new loan for two years.
However, this rule assumes you’ll
pay closing costs out of pocket — which you don’t have to do.
If you can eliminate the upfront
cost of refinancing, the break-even rule no longer applies. You start seeing
‘real savings’ right away.
There are a couple ways to
refinance with low or no upfront costs.
- Roll the closing costs into the loan amount. If you include closing costs in your loan balance, you’ll pay interest on them, which costs you more in the long run. But it eliminates the upfront cash barrier to refinancing
- Ask for lender credits. A ‘lender credit’ means your mortgage lender covers all or part of your refinance closing costs. In exchange, you’ll pay a higher interest rate
Theoretically, both these methods
save you money in the short run while costing you more in the long run.
mortgage rates are so low right now that many homeowners can accept a slightly
higher rate or loan balance and still save money over the life of their loan.
If you choose one of these
methods, you don’t have to worry about ‘breaking even’ — you only have to worry
about your savings.
Good reasons to refinance your home
Often, deciding whether to
refinance is a matter of finding a refi program that meets your needs.
Today’s homeowners have a wide
variety of loan options. Instead of taking the easy route and refinancing to a
new, 30-year mortgage with the same lender, you should explore the different
programs available to you.
The right choice will depend on
your current mortgage and long-term financial goals. For example:
- Is your current loan an FHA, VA, or USDA mortgage? If so, you may be able to use a Streamlined Refinance. This is typically the fastest, easiest way to lower your interest rate and monthly payment. Eligibility requirements are relaxed, and you likely won’t need a new home appraisal
- Do you need cash for a big expense? A cash-out refinance lets you tap home equity and use it for any purpose. Many homeowners cash-out equity to finance home improvement projects, consolidate debt, pay college tuition, or bulk up an emergency fund. Cash-out refinancing is available with conventional, FHA, and VA mortgages
- Do you want to pay off your home early? Consider refinancing to a shorter-term loan, like a 15-year fixed-rate mortgage. This could help you pay off the loan sooner and save a bundle on interest. However, your monthly mortgage payments will be significantly higher than on a 30-year loan
- Are you paying for FHA mortgage insurance premiums (MIP)? Homeowners with FHA loans are usually required to pay MIP for the life of the loan. But if you have at least 20% equity and a 620 credit score, you can likely refinance into a conventional loan with no PMI and lower your mortgage costs
- Have your personal finances changed? If your financial situation has improved, you might qualify for a much better interest rate and loan program than you were initially approved for. A higher credit score, lower debt-to-income ratio, or increased home equity could all help you qualify for a lower-cost mortgage loan
- Is your adjustable-rate mortgage about to reset? If the fixed-rate period on your ARM is nearly up, it’s an excellent time to refinance into a new fixed-rate mortgage. You could lock in a historically low interest rate for the rest of your loan term
Homeowners who are
“underwater” — meaning they owe more on their home than it’s currently worth —
have options to take advantage of low mortgage rates,
Fannie Mae’s high loan-to-value refinance might be a good option for homeowners
looking for a lower rate, but who owe too much on their home to meet
traditional lending requirements.
Fannie Mae’s program replaces government-sponsored programs like HARP, which expired in 2018, and FMERR, which expired in 2019. If homeowners can drop their rate, there are few reasons not to refinance in this environment.
A “safe” refinance option:
The zero-closing cost refinance
There’s a better way to know
whether it’s time to refinance — better than the one percent method and better
than the break-even method.
Can you save money and pay
nothing out-of-pocket to do it?
There’s a good chance you can,
using a ‘no-closing-cost’ refinance.
No-closing cost mortgages
are precisely what their name implies — they’re mortgages for which there
are, literally, no closing costs. When there are no closing costs, there are no
break-even points to consider, and no one-point savings to monitor.
If you can lower your mortgage
rate and pay nothing to do it, it’s almost always a good idea to
In general, for loan sizes of
$250,000 or more, you can get a zero-closing cost mortgage by increasing your
mortgage rate by 25 basis points (0.25%). For loan sizes over $400,000, the
typical increase is 12.5 basis points (0.125%).
The extra bump in your
mortgage rate creates more value for the lender. The lender then uses this
extra value to pay your loan’s closing costs on your behalf. It’s a win-win
situation, and you’ve paid nothing to get your refinance completed.
are available in all 50 states.
Are you eligible to refinance right now?
When you refinance your home, you typically need to complete a full mortgage application and go through the underwriting process — just like when you bought your home. (The exception is for government-backed Streamlined Refinancing, which has relaxed underwriting guidelines.)
Refinance guidelines vary by program. For instance, FHA and VA loans
are generally easier to qualify for than conventional mortgage loans.
But in general, here’s what you can expect a lender to look at when you apply for a mortgage refinance:
- Credit score
— A FICO score of at least 580 is required for FHA refinancing. Conventional
and VA loans typically require 620 or higher. Minimum credit scores are often
higher for cash-out refinancing
- Credit report
— Just like when you apply for a home purchase loan, lenders want to see a
clean credit report with on-time payments and no delinquent accounts
- Home equity
— If you have at least 20% home equity, you might be eligible to remove
mortgage insurance when you refinance. If you have more than 20% equity,
you might be eligible to take cash-out at closing
- Loan-to-value ratio
— Your loan-to-value ratio (LTV) helps determine whether you’re eligible to
refinance. It also determines how much equity you can cash-out. Most lenders
cap the LTV on a cash-out refinance at 80% (meaning you must leave 20% of your
- Existing debts
— Your debt-to-income ratio (DTI) will help determine which refinance programs
and rates you qualify for. Try to avoid taking on new debts (like an auto loan
or personal loan) before refinancing
These criteria also help determine your mortgage rate. The stronger
your personal finances, the lower your new rate will be — and the more you’ll
Mortgage lenders are allowed to set their own eligibility
requirements. So if you think you’re qualified to refinance and one lender
denies you, try again with a different company.
You should also compare Loan Estimates from at least 3-5 lenders before choosing one for your refinance. That’s the only way to find your lowest refinance rate and maximize savings on your new home loan.
What are today’s refinance
rates are at historic lows, and they’re expected to stay
there for the foreseeable future.
Instead of worrying about “saving
one percent” or “breaking even,” you should think about how a refinance can benefit you.
Do you want to save money
month-to-month? Do you need cash for a big expense? Do you want to pay off your
mortgage and be debt-free sooner? A refinance can help with any of these goals.
Check your rates and loan options to see what a refinance can do for