How to know if mortgage refinancing makes sense now
In the post-pandemic era, inflation surged to a multi-decade high and the Federal Reserve responded by raising the benchmark interest rate. Although mortgage rates don't directly track that benchmark rate, borrowing costs still soared for home buyers.
With low mortgage rates off the table, refinancing became a non-starter for anyone who'd obtained a loan at the 3.00% to 5.00% rates customary between 2009 and 2022. Those who bought homes also got stuck with expensive loans, even after shopping for the best rates.
The good news is, the tides are turning. The Federal Reserve reduced rates at its September meeting, with further reductions expected in the months ahead. Mortgage rates are already down over a point and home loans with rates under 7.00% are now available again for many borrowers.
Aspiring homeowners are beginning to come off the sidelines to buy properties before declining mortgage rates push up real estate prices and existing homeowners who bought properties when rates were higher are now grappling with the question of whether to refinance now or wait.
If you're in this situation, it helps to know what to consider now.
Start by seeing what mortgage refinance rate you'd be eligible for here.
How to know if mortgage refinancing makes sense now
Not sure if a mortgage refinance is valuable for you now? Consider the answer to the following questions to help narrow down your decision:
Will refinancing improve your financial situation?
Refinancing involves getting a new loan to repay your old mortgage, changing your loan terms in the process. It makes sense to do that only if the new loan you can secure will have more favorable terms.
"The most important question to ask yourself when considering a refinance is, will this refinance improve my life now and in the future?" advises Aaron Gordon, a branch manager and senior mortgage loan officer at Guild Mortgage.
To answer this question, you'll need to consider whether refinancing will save you money, allow you to accomplish other important financial goals, or both.
"There are many reasons why people refinance their mortgage," advises Melissa Cohn, Regional Vice President at William Raveis Mortgage. "Lower rates, switching from an ARM to a fixed, the end of an adjustable rate initial lock period, debt consolidation, or cashing out, to name the most popular reasons."
If any of these apply to you, it's worth looking at the loan offers out there to see if you can qualify for a new loan that accomplishes your objectives. "With interest rates now 1% lower than they were a year ago, now is a good time to consider refinancing for the reasons given," Cohn says.
Start exploring your best mortgage refinance options online now.
How long will it take to break even?
While refinancing can have significant benefits in the right situation, it's not without costs. You'll want to be sure your new loan is a better deal in the long run even after taking into account fees, which could total as much as 2% to 5% of your loan's value.
"Refinancing only makes sense if the new interest rate is better than your current rate," according to Armstead Jones, Strategic Real Estate Advisor at PropertyCashin. "The only time the rate doesn't matter is if you are pulling equity out of your property."
If you took out a mortgage in the post-pandemic era, today's rates may be lower than what you're paying on your current loan. You may also qualify for a better rate if your credit or other financial credentials have improved. The big question is, just how much lower will that rate be, and will you be in the home long enough to cover the upfront expenses?
"What you're trying to do is get to a place on the figures where your monthly payment falls by enough to offset the closing costs in a reasonable amount of time," according to Jon Bodan, president and founder of The Perpetual Financial Group, Inc. and a strategic financing advisor at HouseCashin. "This is called the break-even point and generally if it's under about 36 months it's a good deal, provided that you plan to be in the home that long."
Bodan says you can get a mortgage professional to run the numbers for you. There are also calculators online that can help you do this math.
Should you wait for better rates?
There's one last important consideration. While you may be able to lower your mortgage rate now, chances are good rates are going to continue to decline for a while. Rushing into refinancing could mean you miss out on opportunities to save even more in the future.
"You may want to wait and see if rates come down further for more meaningful savings," Gordon says. Of course, while the Federal Reserve has signaled more rate cuts are on the horizon and most experts believe mortgage rates are likely to continue declining, that doesn't mean these predictions will pan out.
"Some clients that could benefit from the current lower rate environment are holding off – basically thinking rates will continue to decline, so they're waiting," Bodan said. "This is possible, but there's no guarantee."
Bodan says they generally advise refinancing now if it makes sense based on the numbers, rather than waiting for future cuts that aren't guaranteed. "Worst case, rates fall some more, and in a year or two you refinance again and you didn't fully break even on the original deal. Not something you want to be cavalier about, but it's also not the end of the world. No one can predict what will or will not happen with rates in the future."
The bottom line
If you can improve your financial situation through refinancing and don't want to gamble on rates continuing to decline, consider shopping around for a loan today and moving forward to capture the savings available now. As Boden explained, refinancing again in the future is possible, so why not cut costs today instead of waiting for a future rate drop that may never come?
