Mortgage rates are falling. Here are 3 big signs it's time to refinance.
The news many American homeowners and homebuyers have been waiting for is starting to arrive.
Mortgage interest rates are coming down again, albeit not in a major way. Still, any drop is a welcome one, particularly after they hit the highest point since 2000 earlier in 2023. As of December 8, 2023, the average mortgage rate for a 30-year loan is 7.41% while the average 15-year refinance rate is 6.69%. While these pale in comparison to the rates buyers and owners could have secured just a few years ago, they're still heading in the right direction. Just look at the beginning of November when the 30-year loan rate was 8.06% and the 15-year refi rate was 7.20% for confirmation.
Against this backdrop, many current owners may be wondering if now is the time to refinance their existing homes. While mortgage refinancing may not be for everyone, there are some major signs to look for that could indicate it's the right time for you to act. Below, we'll break down three big signs it's time to refinance now.
Not sure what mortgage refinance rate you'd qualify for? Find out here now.
3 big signs it's time to refinance your mortgage
Does a mortgage refinance make sense for you now? Here are three major signs it may be time to get started.
You can get a lower interest rate than what you already have
While a 6.69% refinance rate isn't considered a bargain by many (particularly when they were under 2% just a few years ago), it could be lower than what you currently have. If you have an adjustable-rate mortgage (ARM) currently, for example, you could be paying more than that. So by refinancing, you'll save money that otherwise would have been going to interest. That said, there are a few caveats to be aware of.
First, make sure that the new rate is at least one point lower than your existing one. Many experts don't recommend making the switch if the difference isn't at least that large. Secondly, you'll want to make sure that you can afford a larger payment. By refinancing into a shorter term, your loan will become condensed and your payments will increase, even at a lower rate. So crunch the numbers before proceeding — or look at refinancing into a 30-year loan instead. Finally, be sure that you're planning on staying in the home long enough to recoup the closing costs required to refinance. If you're not, it doesn't make sense to act, even if you could get some short-term relief.
Explore your mortgage refinancing options here to see if it's right for you.
You want to get rid of the loan sooner
Let's say you recently inherited a large sum of money or your job situation has changed dramatically. In these instances, and some others, you may want to pay down your existing debt quicker. And with mortgages being some of the biggest monthly payments Americans have, it makes sense to look to a refinance.
By refinancing to a shorter time frame, you'll have larger payments to make now, but for a much shorter period than you would have if you kept your loan on the current pace. Plus, you'll save significant sums of money that otherwise would have gone to the lender in the form of interest.
Your finances have changed
Your finances may have changed since you first took out your loan. If you received an adjustable-rate mortgage, for instance, you may have since seen your interest rate increase significantly. In this case, you may want to refinance to a lower, fixed rate instead.
It's also possible that you put a down payment of less than 20% when purchasing your home, thus mandating a private mortgage insurance (PMI) payment to the lender. But if you've since accumulated that 20% in equity (and you probably have, since millions of homeowners now have hundreds of thousands of dollars worth of usable equity), then it may make sense to refinance and have the PMI dropped.
Only you will know which circumstances apply and which ones don't. Take a closer look at your mortgage loan and paperwork and crunch the numbers to see. You may be surprised at what you could save by acting now.
The bottom line
While a mortgage refinance can make sense for many in a low-rate environment, it may not be as beneficial now, even if rates are dropping in a favorable direction. That said, it can make sense to act now if by refinancing you can get your rate lowered by one point (or more). It may also be helpful to refinance to a shorter term if your goal is to rid yourself of the loan as soon as possible. And if your finances have since changed — your ARM rate has gone up or you're still paying PMI when you don't need to — it may be a sign that a refinance is right for you. As with all personal financial decisions, be sure to crunch the numbers carefully and review your budget before acting. By doing so, you'll know if a mortgage refinance really makes sense for you now, or if it just appears that way.
