Should you join the refinance rush to lower rates? Here are five signs you need to refi your mortgage now.
1. Your current mortgage rate is over 4%
Average rates on 30-year mortgages have dropped to a record low 3.13%, according to the popular weekly survey from mortgage company Freddie Mac.
Things are a lot different from a year ago, when borrowers were typically landing rates closer to 4%.
Today's exceptionally low mortgage rates are a rare bright side — if you want to call it that — to the economic turmoil spawned by the coronavirus pandemic.
Multiple experts have told MoneyWise.com that it's worth it to consider refinancing any home loan over 4%.
One recent LendingTree study found that homeowners who refinance home loans that were taken out in early 2019 can save $60 a month for every $100,000 borrowed. The average lifetime interest savings add up to about $20,000. That's serious money.
2. Your credit is in good shape
The best mortgage rates are reserved for borrowers with the best credit. Credit scores range from 300 to 850, and to land a low rate you'll need a score that's exceptional (800 or higher) or very good (740 to 799).
If you haven't looked at your credit score in ages, it's very easy to take a peek at it for free.
And don't worry if your score isn't high enough to impress a lender. You can improve it quickly by:
- Paying off credit card debt, to reduce what's called your credit utilization. That's the percentage of your available credit you're currently using.
- Not closing old credit cards you don't use, as long as they're not costing you annual fees. The credit offered by those cards helps keep your credit utilization down — to help raise your credit score.
- Checking for errors on your credit reports. If you find any, make sure the credit bureau that issued the report fixes them.
- Getting all of your bills paid on time.
Lenders also look at your debt-to-income ratio — the percentage of your monthly income (before taxes) that goes toward paying down debt, including student loans and credit card balances. The lower your "DTI," the better. Mortgage lenders tend to prefer borrowers with debt-to-income ratios under 36%.
3. You plan to stay in the house for a while
Like any mortgage, a refinance comes with a price tag: You'll have to pay closing costs, totaling about 2% to 5% of your loan amount. The U.S. average for mortgage closing costs, including taxes, is $5,749, according to the most recent estimate from real estate data firm ClosingCorp.
Closing costs include fees for a long list of things including your mortgage application, the lender's processing costs, an appraisal, and on and on.
A refinance into a loan with a lower rate will truly save you money if you plan on remaining in the home long enough to more than make back your closing costs.
Let's say your new loan cuts your monthly payment by $100. That's $1,200 a year. If you have to pay $5,000 in closing costs, it'll take you more than four years to recover that expense through your refinance savings.
4. You're ready to protect your investment
Most homeowners understand that they need home insurance to provide coverage and compensation in case of a fire, tornado, hurricane or anything else that damages the house and its contents.
But a home is a huge financial investment, and another way of protecting that investment is with life insurance — so your family will still be able to make the mortgage payments and stay in the home if something ever happens to you.
You may not realize how easy it is to buy life insurance nowadays. For example, the online life insurance marketplace Quotacy will show you three customized rates within minutes, so you can quickly and easily compare policies and find one that best meets your needs.
Life insurance also is surprisingly affordable. Depending on your age and where you live, you might be able to get $1 million in coverage for as little as $7 a week.
5. Paying off your old loan won't cost you anything
Before you move forward with a refinance, look through the paperwork on your current mortgage to be certain there's no penalty for kissing it goodbye.
Some mortgages charge you a fee if you pay off the loan early, especially during the first few years.
These prepayment penalties are rare, but if your loan has one you might get hit for thousands of dollars. You may have to pay a lump sum or a percentage of the balance left on your mortgage. The fees tend to turn up on interest-only mortgages and other less conventional loans.
Prepayment penalties can be a pain, so they're something else to keep in mind as you compare rates and terms and look for the perfect mortgage for your refinance. If you're a good comparison shopper, you might do even better than that braggy guy down the street.
Take a look at today's best mortgage rates where you are: