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By Leslie Cook
Updated: December 2, 2021 1:30 PM ET | Originally published: November 16, 2021
girl coming down a swing with two zeros on the side representing a percent
Kiersten Essenpreis for Money

Mortgage rates are back above 3% and many homeowners may be wondering if a mortgage refinance still makes sense.

Refinancing can lower your monthly payments or allow you to switch to a loan term that better suits your needs. Lower rates, mean more people can benefit.

Currently, 13.1 million qualified borrowers could reduce their interest rate by at least 0.75 percentage points with a mortgage refinance, according to mortgage data company Black Knight. Those borrowers could save an average of $284 per month. Around 1.5 million of the total refi candidate pool could save $500 or more per month at the current rate.

More than 9 million homeowners have already refinanced over the course of the coronavirus pandemic, according to Black Knight. Those borrowers have saved an aggregate of $1.3 billion per month.

With the potential savings that a mortgage refinance could provide, it's worth the effort to find out if now's the right time for you to take the next step and apply. Read on for information that can help you decide.

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If your current mortgage rate is above 4.11%, now is a good time to refinance

Mortgage rates for well-qualified borrowers have been hovering around 3% or less for the past four months. The current average for a 30-year fixed-rate loan is 3.11%.

One of the indications that a refinance is a good idea is if you can reduce your current interest rate by at least 0.5% to 1%.

If you have a $300,000 balance on your mortgage and you refinance to a new 30-year loan, lowering your interest rate from 3.75% to 3.25% will save around $84 per month or $1,008 per year. If you can reduce the rate by 1%, from 3.75% to 2.75%, your monthly savings would be $165 per month or $1,980 per year.

Of course, you don’t have to refinance into another 30-year loan. If your finances have improved and you can afford higher monthly payments you can refinance your 30-year loan into a 15-year fixed-rate mortgage, which will allow you to pay the loan off faster and also pay less interest.

Taking a look at your monthly savings is just one part of the refi equation, however. You also need to factor in the cost of switching out your loan and how long it will take you to recover those costs, or ‘break even’.

Just as with a purchase loan, you’ll have to pay closing costs on a refinance. These costs can include origination and applications fees, appraisal and inspection costs and title search fees. In all, closing costs can run between 3% and 6% of the total loan amount being refinanced.

You can determine your breakeven point by dividing your total closing costs by the amount you’ll save each month. The result is the number of months it will take you to recoup the refinance cost and start saving money. The less time it takes to break even, the more sense it makes to refinance your home loan.

The final piece of the refi puzzle is balancing your refinance goals with the change in the length of the loan. For example, if you are 10 years into a 30-year mortgage, refinancing into another 30-year loan means you’ll be paying a mortgage for 40 years instead of 30.

If your primary reason is reducing your monthly payment, refinancing into another 30-mortgage makes sense. However, if your goal is to save on interest and reduce the term of your loan, then refinancing a 30-year into a 15-year mortgage may be the better option, as long as you can afford the higher monthly payments. Use a mortgage refinance calculator to get a sense of what might work for you.

Are mortgage refinance rates still low?

When the COVID-19 pandemic first hit in March of last year, the Federal Reserve devised a monetary policy to help stabilize financial markets and soften the economic impact of the virus. Part of that policy included reducing the federal funds rate — the interest rate banks charge each other for short-term loans — to near zero.

The Fed also pledged to purchase $40 billion worth of mortgage-backed securities, and $80 billion in Treasury notes and other financial instruments per month to inject money into the economy and encourage investing and lending.

However, with the economy continuing to show signs of improvement, the central bank announced at its November meeting that it would begin to taper its asset purchasing program. Beginning later this month, the Fed will begin reducing its purchases of Treasury notes by $10 billion each month and of MBS by $5 billion per month.

The net effect of these policies was to drive mortgage rates down, with the average rate for a 30-year dropping below 3% for the first time in history in July 2020. Rates reached a record low of 2.65% on January 7 of this year. Since then, rates have trended higher but hovered around 3%. After rising to a high of 3.14% on October 28, rates tumbled once again and are currently averaging 3.11%.

Still, if you’re considering a refinance, it may be best to act sooner rather than later. Most economists agree that mortgage rates will increase in 2022, with rates ending the year between 3.5% and 4%.

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How to know when to refinance your mortgage

Here are some key points you should consider when deciding whether to refinance your mortgage:

  • Your credit score. With most mortgage lenders, you’ll need a credit score of at least 620 to qualify for a mortgage refinance. To get the lowest mortgage rate, you’ll need a 740. Also keep in mind that, if your credit is lower than it was when you took out your current mortgage, you may not qualify for as favorable a rate as you did before.
  • Your debt-to-income ratio (DTI). For conventional loans, some lenders will work with a DTI as high as 43%. FHA loans will go a little higher, usually accepting DTIs of 50%. Lower, however, is generally better.
  • How long you’re staying. When you refinance, you’ll need to pay closing costs. If you plan to move out in the near future, you may not break even.
  • How much equity you have in your home. In order to qualify for a mortgage refinance you generally need at least 20% equity in your home.

Don’t try to time the market. Waiting on rate swings is as troublesome as timing the stock market. Don’t wait to see what happens with mortgage rates tomorrow if you can save money or move closer to your financial goals by refinancing today.

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Mortgage Refinance FAQ

Are refinance rates going down?

While current mortgage rates remain low, most mortgage experts anticipate rates will drift higher over the coming months and years. The Federal Reserve is expected to begin raising rates around mid-2022. The Fed does not set mortgage rates, but lenders tend to increase the price to borrow money when the Fed acts.

Why would refinancing be a bad idea?

Refinancing is a bad idea if it doesn’t represent some sort of gain, be it in the form of lower monthly payments or saving on interest by reducing the term of your loan. If the interest rate being offered isn’t at least 0.5% lower than your current rate, it’s probably not worth the cost of a refi. Another reason not to refinance is if you plan on selling the house before you reach your breakeven point or if the new monthly payment is more than you can comfortably afford.

Is it cheaper to refinance with my current lender?

Not necessarily. While having an established relationship with your current lender may lead to more favorable rates, it’s not a guarantee. Your best option for finding the best mortgage rate is to shop around and consider different types of lenders, including banks, mortgage brokers, private lenders and credit unions.

How do I get the best refinance loan rates?

Try to go through the mortgage pre-approval process with at least three lenders to find out your real rate and make sure you are getting the best deal. Freddie Mac has found that borrowers save an average of $1,500 over the life of the loan by getting one additional rate quote — and an average of about $3,000 if they get five quotes.