Refinancing your mortgage can lower your monthly mortgage payments, cut down the amount of time you need to pay, or even pull money out to pay down credit card debt or student loans via a cash-out refinance. With rates at record lows, roughly 18 million borrowers could potentially benefit from a new loan, according to real estate data firm Black Knight.
If you’re going to invest both time and money into the refinance process, make sure your mortgage rates are lower than your previous loan, and that refinancing makes sense for you and your budget. If you’re already convinced, a good place to start is our list of the best mortgage refinance lenders of 2021.
Yes, Now Is A Good Time to Refinance Your Mortgage
According to the current mortgage rates, now is a good time to refinance your home, although the window for low rates is closing.
While the coronavirus pandemic has made the mortgage insurance industry reach rates below 3%, these are starting to increase again. Average costs on a 30-year fixed-rate mortgage were below 3% throughout April 2021 but have now increased to 3.35% as of May 21, 2021. Compared to last year’s rates — which were 3.28% in May — you can easily see that they’re starting to bounce back to normalcy.
This increase was predicted by various groups, including Fannie Mae and The Mortgage Bankers Association (MBA). The former says that by the end of 2021, rates will rise to 3.4%, while the latter predicts an increase to 3.7%. Note that it’s still feasible that rates might drop below 3% again in 2021, but it won’t necessarily be the norm.
With stabilizing premiums on the horizon, why would now be a good time to refinance your mortgage payments? Simple: Even with these increases, rate averages are still better than those from past years. For example, rates during the 2010s averaged around 4% and reached 4.17% in 2014; even 2019 saw a 4.4 average for 30-year mortgages.
Essentially, you can still get better than average rates. If you want to know your potential mortgage loan rates right away, you can use our mortgage calculator.
Reasons Behind the Current Refinance Rates
The cause of the current rate increase is not that mysterious. Thanks to rock-bottom rates, the best mortgage lenders are being swamped with applications. The mortgage pipeline has many components to it, and if any one of those gets clogged, the whole process can get backed up.
“A lot of this rate spread is due to capacity constraints,” said Mike Fratantoni, chief economist of the Mortgage Bankers Association. “When lenders get a surge in volume, they have to decide: Do I hire full-time staff for that, or get temporary workers, or turn to outsourced providers? And in this environment with a remote workforce, everything is taking longer. It’s not just one lender facing constraints – it’s the entire system.”
Indeed, over the first quarter of 2021, the number of residential refinances surpassed 1 million, representing $328.5 billion in total volume, according to ATTOM Data Solutions. Almost 56% of the total number of current home loans originated in the quarter, with high refinancing activity in Chicago, Los Angeles, Dallas, New York, and Houston.
However, as businesses start to open and more citizens get vaccinated, rates are increasing again. Due to this, your window for a money-saving refinance might begin to close.
How to Know When to Refinance Your Mortgage
The right call for refinancing homeowners depends on your circumstances, including your personal finances, current loan rate, and how long you plan to stay in the home. Here are some key points you should keep in mind when considering refinancing:
Be aware of your budget: If you use most of your money, including your monthly savings, to pay off your mortgage, you should consider refinancing for better terms. Though you won’t need to pay a new down payment, refinancing still has associated costs, so make sure to take these into account as well.
Check your debt-to-income ratio (DTI): The lower this number, the higher chances are of lenders approving your refinancing.
Reduce your current loan rate by at least half a point: Typically, a half-point differential or more makes refinancing worth the hassle.
Think about how long you’re staying: Analyze if you’ll be selling your home soon or when that time may come. You shouldn’t get a new 30-year refinance if you’re moving away in a few years.
Don’t try to get the lowest rate possible: 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.
Seek an expert: Search for a loan officer or another professional to guide you through the underwriting process. Having professional help can improve your chances of getting better loan terms, although you’ll have to pay extra for their services.
Finally, bear in mind that you may be charged a higher rate than lenders are advertising, depending on your credit score and how much home equity you currently have. 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 an additional rate quote — and an average of about $3,000 if they get five quotes.
Mortgage Refinance FAQ
Are refinance rates going down?
Due to the ongoing pandemic, the Federal Reserve has kept mortgage interest rates low. This caused refi rates to hit below 3% in 2020 and throughout the first half of 2021. Unfortunately, as the economy begins to bounce back, various organizations have predicted that mortgage rates will increase again, averaging around 3.3 to 3.7% by the end of 2021.
Why would refinancing be a bad idea?
Refinancing is a bad idea if the process drastically increases your overall loan costs — including closing costs — or if it hinders your ability to pay for your loan. If you have extra funds and would like to decrease your total loan amount, you can opt to refinance for a shorter loan term. You’ll avoid higher interest rates, but your new premium rates will increase, making your monthly payments more expensive. If you can’t afford these extra monthly payments, a shorter loan term would be detrimental for you and your budget. When considering refinancing, evaluate your loan terms, past financial decisions, and current financial situation. When you’re set, choose the option that works best for you.
Is it cheaper to refinance with your current lender?
It’s possible to lower monthly payments and get cheaper rates if you’re upfront with your lender and decide to refinance your current loan. If you’ve been a loyal customer, there’s a chance they’ll offer discounts or special rates for your loan refinance. Unfortunately, availability and discount percentages vary significantly from lender to lender, so there’s still a chance that you’ll find better rates getting a new mortgage with a different, FHA-approved company.
How do I get the best refinance loan rates?
There are three things you can do to get low interest rates for your original mortgage. First, improve your credit score: a good credit report shows that you can make payments diligently, so lenders see you as less risky to insure. Secondly, you can renegotiate your loan’s term length, as this can drastically change the premium and overall upfront costs. For example, if you have a 30-year loan, and you’ve paid it for sixteen years, you can refinance the remaining fourteen into a longer or shorter term with better rates. Thirdly, you can shop online for rates, which vary significantly from company to company.
Having quotes from at least three different providers increases the chances of getting a better rate, and it gives you leverage to negotiate with them. It’s important that you find a comfortable rate for your loan, as this can help you reach a break-even point.
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