Many homeowners who secured mortgages in recent years, when interest rates were between 6% and 7% and even touched 8%, are now watching for chances and asking, “Should I refinance my mortgage?” With the possibility of the Federal Reserve cutting rates, it is essential to understand when should you refinance your mortgage.
Should I Refinance My Mortgage?
The age-old question “Should I refinance my mortgage?” always comes up, especially with the hope that rates might be coming down soon. The high mortgage rates of the past led to a drop in refinance activity in 2023, hitting its lowest level in 30 years.
According to Freddie Mac, a government-backed mortgage buyer, there were only $75 billion and $80 billion in mortgage refinance originations nationally in the first and second quarters of 2023, respectively.
According to Chen Zhao, a senior economist at Redfin, a real estate brokerage site, the ideal moment to start refinancing your mortgage depends on when you purchased your home. Experts advise waiting until interest rates drop by a whole percentage point before refinancing your mortgage, as it has a significant impact.
However, once rates start decreasing by at least 50 basis points from your current rate, it might be a good idea to reach out to your lenders or loan officers. They can help you determine if refinancing your mortgage makes sense. This is based on factors such as the associated costs, potential monthly savings, and plans for how long you intend to stay home.
When Should You Refinance Your Mortgage?
Another key indicator that will help you understand when should you refinance your mortgage is your ability to pay your closing costs. Refinancing your mortgage is similar to getting a new loan. It requires you to pay closing costs, which usually include an appraisal and title insurance.
In 2021, the average closing cost for a refinanced single-family mortgage was $2,375, up 3.8%, or $88, from the previous year, according to CoreLogic’s ClosingCorp.
Refinancing your mortgage might be more financially beneficial if you can pay those costs upfront instead of adding them to your new loan. If you finance the closing costs, some lenders might charge a higher interest rate, and you’ll end up paying interest on those expenses for the entire mortgage life.
Ostrowski said it is important to be thoughtful and have a solid plan for how much money you will save and if it is worthwhile while refinancing your mortgage.
Refinancing your mortgage might be a good idea if you purchased your home with an FHA loan. While these loans are helpful for first-time buyers, they come with a required Mortgage Insurance Premium (MIP) that can add up. According to government data, most new borrowers pay an annual MIP equal to 0.55% of their loan.
Ostrowski said that if you have an FHA loan, refinancing your mortgage for a slightly lower rate could be beneficial if it helps you eliminate that mortgage insurance premium. For example, on a $328,100 FHA mortgage, the owner would pay around $150 monthly for the life of the loan with the 0.55% annual premium, as per Bankrate calculations.
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