There’s a reason why so many consumers refinanced their mortgages during the crisis.
Mortgage rates, particularly refinance rates, have been relatively competitive since mid-2020.
Borrowers have been eager to save money by refinancing their old mortgages with new ones.
However, demand for home refinancing fell dramatically last week.
Refinances plummeted 15% from the previous week and 41% from the same week a year ago, according to the Mortgage Bankers Association.
What is the reason for the decrease?
Last week’s drop in refinance demand was largely due to rising interest rates.
Refinance rates are often higher than those offered to borrowers for a buy mortgage (one that finances a home being bought).
Borrowers may have been alarmed by the increase.
But that doesn’t mean refinance activity will be slow for the rest of the year.
If rates fall further, more borrowers may choose to refinance their mortgages before the end of 2021.
Is it a good idea to refinance your mortgage?
Refinancing your mortgage could cut your monthly payments and provide you more financial freedom.
Is this, however, the best course of action for you?
Before you refinance, consider the following points:
- What is the state of my credit score?
The higher your credit score, the more likely you are to be able to refinance at a competitive interest rate.
There’s probably no need to do anything to improve your score if it’s already in the upper 700s or higher.
With that kind of score, you should be able to get the best interest rate from any refinance provider.
If your credit score is low, though, it may be worthwhile to concentrate on improving it before applying for a refinance.
- What is the current rate of interest on my loan?
If you have a low interest rate on your current mortgage, refinancing might not be worth your time.
In general, your refinancing goal should be to reduce your existing loan’s interest rate by roughly 1%.
That may not be possible if you’re already paying very low interest.
“What’s the big deal if I only save a little money by refinancing?” you might be wondering.
To replace your existing mortgage with a new one, you’ll have to pay closing expenses.
As a result, you want your savings to be strong enough to cover such expenses.
- Do I intend to stay in my current residence for a few more years?
Closing expenses may be worthwhile if they save you money on your mortgage payments in the long term.
However, you must ensure that you intend to stay in your property long enough to save money.
If you pay $4,000 in closing expenses to save $200 per month on your mortgage payments, it will take you 20 months to break even.
So, if you plan to move in a year, it’s usually best to hold off on refinancing.
Despite the fact that refinance activity dropped dramatically last week, things could change as 2021 draws to a close.
Run through the questions above if you’re on the fence about refinancing.
Also, there’s no need to rush into applying for a refinance this year.
Once 2022 begins, rates are likely to stay attractive and competitive.
A once-in-a-lifetime chance to save thousands on your mortgage
Interest rates are unlikely to remain at multi-decade lows for much longer.
That’s why, whether you’re looking to refinance and lower your monthly mortgage payment or you’re ready to buy a new house, acting now is critical.