Refinancing is back in place. Should You Get a New Mortgage?


Here’s how to know if refinancing is right for you.

Homeowners have been refinancing en masse since mid-2020, when mortgage rates started dropping to record highs. Mortgage rates today are higher than they were last summer, but they are still very competitive on a historical basis. From an interest rate perspective, now is a good time to swap an existing home loan for a new one.

Obviously, many owners agree. Last week, refinancing demand rose 9% from the previous week, reports the Mortgage Bankers Association. And while that hike may have been fueled by a brief drop in mortgage rates, some homeowners may also want to start refinancing before the end of the year.

If you are thinking about refinancing your mortgage, the current interest rates are certainly a compelling case for doing so. But you’ll also need to make sure your situation is such that refinancing makes sense.

How is your credit rating?

While refinancing rates today are at attractive levels, your best chance at getting a great rate is by getting a high credit score. While your credit score might require a bit of work, it might be beneficial to delay refinancing until you are able to increase it.

That said, you don’t need perfect credit to get an affordable refinance rate. Once your credit score hits the middle of the top 700, it doesn’t matter what exactly that number looks like. If your credit score recently dropped from 802 to 795 because you applied for a new credit card, that’s hardly a reason to delay refinancing, especially with mortgage rates so attractive right now.

On the other hand, if your score recently dropped from 720 to 630 because you paid a bill or two late, then this is a scenario where it might pay off to delay refinancing. A score of 630 could result in a higher interest rate than what you would like to lock in.

Do you have any short term plans to relocate?

When you refinance a mortgage, you are charged closing costs to finalize that loan. These fees are usually 2% to 5% of the amount you borrow. You will need to make sure that you intend to stay in your home long enough to recoup these costs and save money.

Imagine being charged $ 5,000 to refinance your current mortgage. This could lower your monthly payments by $ 200, but it will take you 25 months of lower payments to offset your closing costs. If you plan to move in two years, refinancing won’t make sense.

While refinance rates are currently at affordable levels, the good news is that they are likely to stay that way for a while. If you haven’t yet considered refinancing, don’t worry. With the holidays approaching, you may not have time to submit applications and shop around for the various refinance lenders. But if you decide refinancing is right for you, there’s a good chance mortgage rates will still be favorable in early 2022.

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