Holy cow are mortgage rates low. Still. And they don’t seem to be going anywhere. So, you’re wondering: Should I refinance now?
It all depends on whether you’re eligible and just how much you’ll save.
Are You Eligible to Refinance?
To be eligible to refinance, you need:
Equity. You can’t refinance if you’re underwater. Like all mortgages, you’ll have the best shot at approval if you have at least 20 percent equity.
Good Credit. The mortgage market has thawed a little bit, but lenders are still cautious. Plus, you won’t qualify for the best rates without top notch credit. Check to make sure your credit score is at least in the 700s before refinancing.
Ample Income and Little Debt. Mortgage lenders want to see that you have a reliable income and don’t have a lot of other debt. This shows them that you’ll be able to make the mortgage payments. This is no different than when you first applied for the mortgage. When you refinance, you put your income, debts, and bank statements under scrutiny all over again.
Will You Save Enough to Refinance?
Right now, the best mortgage rates on 30-year fixed home loans are about 4.75% (or 4.02% on a 15-year fixed mortgage).
If you currently owe $200,000 on your mortgage at 5.75%, refinancing could save you more than $100 a month on your payment and reduce the interest you pay over the life of the loan. And that’s the important part.
Unless you’re having trouble making your mortgage payment, the goal of refinancing should be to save money on interest over the life of the loan. Often that coincides with a lower monthly payment, which is nice, but extending the term of your mortgage—even at a lower rate—doesn’t make sense unless you ultimately pay less interest, not more.
And don’t forget it costs money to refinance. Closing costs are typically between two and four percent of the loan (that’s $3,000-$6,000 on a $150,000 refinance). Those costs include an application fee, appraisal, home inspection, and attorney’s fees.
The Only Way to Know
Will a mortgage refinance save you money? The only way to know is to get current mortgage rate quotes based upon your home and credit and then run the numbers through a refinance calculator.
You can get competing refinance quotes online with no obligation to give you an idea of where you might fall. I also recommend applying with your local community bank or credit union; these institutions often have the best rates and can guide you through the process. On the downside, they may have the tightest credit, income, and equity requirements.