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Once mortgage rates start dropping, homeowners are often tempted to refinance their home loans.
Refinancing replaces your current mortgage with a new loan and new terms. With rates at historic lows, millions of homeowners have already made this move — and another 18 million could potentially save money from a refinance, according to mortgage data firm Black Knight.
But it’s not the right choice for everyone, even if you qualify for a lower interest rate. You’ll also want to consider how long you’ll be in the home and how long it takes to recoup expenses.
Here’s how to tell whether now is a good time to refinance your home:
- Is now a good time to refinance?
- How much does it cost to refinance?
- How long does it take to refinance?
- Why should you refinance?
Is now a good time to refinance?
And if you’ve paid off some of your principal since taking out the original mortgage, your new loan will be based on a lower balance. That can further lower your monthly payment and save you more money.
Learn More: How to Get the Best Mortgage Rates
How much does it cost to refinance?
Even if you qualify for a lower interest rate, you’ll need to consider the costs of refinancing your mortgage to determine if it’s worth it.
Closing costs typically amount to 2% to 5% of the principal amount of the loan. So if you borrow $300,000 and closing costs are 2%, then you would owe $6,000 at closing.
Other factors, such as where you live, influence the price tag. Here are some of the common costs that come with refinancing:
|Loan origination fee||0.5% to 1.5% of the loan amount|
|Appraisal fee||$300 to $500|
|Title insurance fee||$1,000|
|Credit report fee||$30 to $50|
|Prepaid interest charges||Depends on your interest rate and when your loan closes|
|Mortgage points||Depends on how many points you pay for
(1% of your mortgage loan amount equals 1 point)
Some lenders may offer you a no-cost refinance, which means you won’t pay closing costs upfront. But they’ll make up for this by either wrapping the closing costs into the mortgage principal or increasing your interest rate. You might still come out ahead, but compare the interest costs on your original loan and the new loan to be sure.
How to know when you’ll break even
For instance, it would take about 35 months to break even on $5,000 in closing costs if your monthly payment drops by $143. But if you sell the house before the break even point, you’ll lose money in the deal. If you know you’ll move soon, then refinancing might not be worth it.
How long does it take to refinance?
A mortgage refinance typically takes 30 to 45 days to complete, but it may take longer if your lender is dealing with high loan demand or something else slows down the deal. One way to prevent losing out on a good mortgage rate is to lock in your rate for a given period, around 30 to 60 days.
Refinancing through Credible will streamline the application process so you can save time and potentially get to the closing table faster. Use the form below to get started.
Why should you refinance?
By refinancing, you may be able to lower your monthly mortgage payments, save on interest, get a shorter loan term or take out cash — but you generally can’t do it all at once. You’ll need to figure out your main goals before applying.
To save on interest
If you qualify for a lower interest rate, you can save on interest costs while also lowering your monthly payment. To see if you come out ahead, figure the interest costs on your current loan and the new mortgage.
To pay off your loan sooner
If getting out of debt ASAP is important to you, then refinancing into a shorter-term loan can help. While your monthly payments will likely climb because you’re paying off debt within a shorter time frame, you could save a lot on interest costs.
Take a look at the original mortgage from the example above. If you refinance from a 30-year loan with a 4% rate into a 15-year mortgage with a 3% rate, you’ll take on a higher monthly payment, but you’ll also pay off your mortgage 14 years sooner. In the process, you save $105,911 in interest compared to your original loan.
To change to a different loan type
Homeowners can also refinance from an adjustable-rate mortgage (ARM) to a fixed-rate loan — or vice versa.
To tap into home equity
Tapping into your home equity through a cash-out refinance is another reason to refinance. This involves getting a new mortgage for more than your current balance and pocketing the difference.
You’ll pay off a larger mortgage balance, but you can put the excess money toward higher-interest debt or home renovations.
If you’re considering a cash-out refinance, be sure to consider as many lenders as possible. Credible makes finding the best deal easy — you can compare multiple lenders and see prequalified rates in as little as three minutes.