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Mortgage refinancing rates are very low right now, with some rates starting at below 3% as of the writing of this article (you can compare today’s best refi rates here). Indeed, “while rates continually fluctuate, they have dipped to record-setting lows this year,” says Alfredo Padilla, a spokesperson for Wells Fargo home lending. What’s more, many experts expect interest rates to rise this year, so now may be the time to act. Or is it? We asked a variety of experts how to know when a mortgage refinance makes sense for you.
Do this math: “If you can reduce your rate by half to three-quarters of a percentage point and you plan to be in the home for more than three years, look into refinancing,” says Bankrate’s chief financial analyst Greg McBride.
(Find the best mortgage refinance rates in your area here.)
For example, “today, a borrower with excellent credit can get a 30-year mortgage at around 3%. If that describes you, you might benefit from a refinance if your current loan has a rate of 3.75% or higher. For people who plan to stay in the home for several more years, it might make sense to refinance if it means cutting the interest rate by just half a percentage point,” explains Holden Lewis, home and mortgage expert at NerdWallet.
And this math: Lauren Anastasio, certified financial planner at SoFi, says refinancing generally costs 2-5% of the principal amount of your loan. “Make sure the math checks out to ensure your refinance will save you money. The length of time you plan on owning the home can affect whether refinancing is worth the expense,” says Anastasio.
Look at what type of loan you have: McBride says now is a great time to trade that adjustable rate mortgage for the certainty of a fixed rate. ‘Today’s fixed rates are lower than what many adjustable rate loans would reset to, and that will only get worse in the years ahead with interest rates likely to rise,” says McBride.
(Find the best fixed mortgage refinance rates here.)
Shop around: It’s essential that you look not only at rates from multiple lenders —find the best mortgage refinance rates in your area here — but also that you take into account closing costs, origination fees, appraisal fees, title search fees, application fees and attorney fees when applicable.
Consider a refi over a HELOC: If you’re looking to tap your home equity, you may want to do so with a cash-out refi rather than a home equity line of credit, McBride says: “Consider a cash out refinancing. You’ll get a lower, fixed rate without worries of future increases and be able to reduce the rate on your existing mortgage balance.”
Shorten your loan term to 15 years: If you think you’re living in your forever home and paying your mortgage in full is one of your financial goals, you may be enticed to use a 15-year mortgage. “A shorter term can save you a significant amount of money over the duration of your mortgage loan if you can comfortably afford the change in monthly cost. Shortening your term will likely cost more monthly but can save you thousands of dollars in interest over the life of the loan,” says Anastasio.
(Find the best 15-year mortgage refinance rates here.)
Ditch your FHA mortgage insurance through a refi: Some people refinance to get rid of FHA (Federal Housing Administration) mortgage insurance. Here are details on how to do that. “They should wait until they have 20% equity,” Lewis advises of when to make this move.
Talk to a mortgage broker: Don’t want to do all the homework yourself? A mortgage broker who serves as a middleperson between you and the bank can help you apply for loans and find competitive interest rates. They’re independent of specific banks and tackle a lot of the legwork including pulling documents and negotiating terms. Asking friends or family for referrals they’ve used is a great way to find a broker, but there are also online services that can help facilitate an introduction with one.