Is Now a Good Time To Refinance?
Is now a good time to refinance?
Mortgage rates have fallen to record lows, leading to a refinancing boom. But, a new fee announced in mid-August by mortgage giants Fannie Mae and Freddie Macmight complicate your refinance decision.
The agencies, which back most mortgages in the U.S., on Dec. 1 began charging a new 0.5 percent fee on all refinancings of $125,000 and over. That would add $1,500 in new costs for a borrower refinancing a $300,000 loan. But the fee gets complicated: Lenders, not borrowers, pay the fee, and they've begun charging higher interest rates to absorb the new cost.
The fee only applies only to loans backed by Fannie Mae and Freddie Mac. So you might be able to skip this fee if you work with a lender that holds the loans it originates in its own portfolio. All jumbo loans fall into this category and would avoid the new fee.
Before refinancing, determine your break-even point. That’s the point when you gain back the costs from the refi and start saving.
Freddie Mac’s notice to lenders about the new fee cited “risk management and loss forecasting precipitated by COVID-19-related economic and market uncertainty.” Consumer advocates and the lending industry decried the additional cost.
“Make no mistake, the consumer is going to end up paying this fee,” says Greg McBride, CFA, Bankrate chief financial analyst. “Diluting the benefit of refinancing and discouraging homeowners from doing so during the worst economic downturn in 90 years doesn’t make sense. As if there aren’t enough fees involved in refinancing, as if the process doesn’t contain enough unwelcome surprises for the borrower, now you have this.”
Why haven't homeowners refinanced?
Months of record-low mortgage interest rates have led to a refinancing boom, but many homeowners have not taken advantage of the potential savings. By some estimates, as many as 20 million current mortgage holders have interest rates of 4 percent or more, and still have not considered getting a new loan with a rate that can be a full percentage point lower.
In a Bankrate nationwide poll, the reasons for not refinancing varied, but a little more than half of the respondents said they hadn’t even considered a refi and 27% admitted they don’t know what their current mortgage rate is.
Many homeowners we polled said refinancing wouldn’t save them enough money to make it worthwhile, which is often true for borrowers who are near the end of their mortgage term. To that end, millennials were more likely to refinance in 2020 than baby boomers, the poll found.
Here are some tips if you’re hoping to refinance while rates are still low:
Developing good saving habits and sticking to them will help you be able to afford your closing costs when you’re ready to refinance. With enough cash in the bank, you may even be able to afford the higher monthly payments of a shorter-term loan, which will save you lots of money in interest in the long run.
Look for no-cost closing options. Many respondents to the survey said the upfront costs of a refinance were a deterrent, but lots of lenders offer no-cost closings. Keep in mind, these options usually work out to be more expensive over time, because the fees you’d pay in a lump sum when you close get rolled into your loan balance or a higher rate instead, which means you wind up paying interest on those costs, too.
Get your paperwork organized in advance. Your lender will ask for a lot of documents when you apply for a new mortgage, and it can be stressful getting everything in order. Compile things like tax returns, pay stubs, W-2s, current mortgage statements and bank statements in advance to reduce the stress.
If you have poor credit, look into government programs or try to give your score a boost. There are many options available to low-credit borrowers such as FHA loans. And while you can expect to pay higher interest rates than people with stellar credit, you may still be able to reduce the rate on your current loan.
Finding the best refinance rate
The best way to get the lowest rate is to shop around. Start by checking out our rate tables to see what lenders are offering. Also, find out what kind of rate you can get from your bank or credit union. Some lenders will even waive certain fees for existing customers.
Mortgage interest rates vs. APR?
Be sure to compare APRs, not just interest rates. The APR (annual percentage rate) is the total cost of the loan, including everything from interest rate to administrative fees. This is how much you’ll actually pay; the interest rate is just one portion of your total cost. So while some lenders might have higher interest rates, their fees could be lower, making the APR lower than someone with a lower interest rate, or vice versa.
The Bankrate guide to mortgage refinance
What is a mortgage refinance?
A refinance lets you pay off your old loan and replace it with a new mortgage at a new term and a new rate. You’ll have to provide a small mountain of documents, including tax returns and bank statements.
How do refinance rates differ from mortgage purchase rates?
Refinance and purchase loans typically have the same rate. Borrowers might notice slightly higher refinance rates when they’re in demand. Experts don’t recommend trying to time the market — in other words, waiting for rates to drop — as there are so many variables that can affect rates, making it difficult to accurately predict whether they’ll rise or fall.
If you find a rate that will save you money, then it’s a good idea to lock it in so you don’t risk missing out if rates jump.
Types of refinancing
Rate and term refinance: A rate and term refinance lets you replace your existing mortgage with a new one that has a different rate, terms or both. Unless you make a lump sum payment toward your principal, it does not change how much you owe.
With a rate and term refinance borrowers can reduce their interest rate, lower their monthly payments (by extending their loan) or shorten their term (which raises monthly payments) in order to pay off the loan faster.
This can be a helpful option for people who have high-interest rates and qualify for a lower rate, thereby saving money each month and over the life of the loan.
Rate and term refinances are also useful products for those who want to change the terms of their loan. For example, if you need to reduce your monthly payments, you might be able to extend your loan, so your monthly payments are smaller but you pay off your loan in a longer amount of time. The opposite is true, too: if you want to pay off your loan faster, you can shorten the term and pay higher monthly payments. Of course, you can combine a rate change (presumably locking in a lower rate) with a term change (longer or shorter).
You can’t get cash out of your home equity with a rate and term refinance, to do that you would need to get a cash-out refinance.
Cash-out refinance: A cash-out refinance allows you to tap your equity by refinancing your mortgage. Because you're withdrawing cash from your home’s value, the new mortgage will be higher. Lenders typically limit cash-out refinances to no more than 80 percent of your home’s value so that you still have some equity left in your home.
Sometimes lenders will also charge higher interest rates because the loan amount is increasing. Between a larger mortgage and higher interest rate, make sure you run the numbers before you go this route.
Streamline refinance: Streamline refinance is a product specifically for FHA-insured mortgages. The advantage of streamline refinancing is that there are minimal credit requirements and the loan processing is typically fast (because appraisals aren’t required and there are fewer asset and income verification requirements). A streamline refinance can also be less expensive than conventional refinancing. Some lenders offer streamline refinances with no upfront costs wherein the lender will pay some or all of the closing costs in exchange for a higher interest rate.
Basic requirements of a streamline refinance include the following:
Must be an FHA mortgage
All mortgage payments must be up to date
The refinance will benefit the borrower (i.e. save the borrower money)
Borrowers can’t get more than $500 out of the mortgage that will be refinanced
Closing costs for refinancing
Closing costs for refinancing your mortgage can cost thousands of dollars, usually between 2 and 5 percent of the loan amount. They also depend on where you live, as origination fees, third-party fees and taxes can vary by city and state.
Which bank has the best refinance rates?
There is no one bank with the best refinance rates. Rates can change frequently, by institution, for a number of reasons. So while a certain lender might have the best rate one week, its rates could rise the following week. To get the most accurate rate when you're ready to apply for a refinance is to shop around the day you’re ready to apply. You can start by looking at our rate tables, which are updated daily.
Is it worth it to refinance?
Refinancing saves you money if you can lower your interest rate enough to make up for the closing costs, which can total 2 to 5 percent of the loan. Refinancing can also make sense if you need to reduce your monthly mortgage payments by taking out a new loan with a longer term.
Before you apply for a mortgage refinance, check your credit score. To get the most competitive interest rate, your credit score should be 740 or higher. If your FICO score is on the lower end of the spectrum, take some time to improve it so that you can get the lower rate.
Use our Mortgage Refinance Calculator to run the numbers for your specific mortgage rate and term, this will give you a clear picture of how much you can save by refinancing.
When should you refinance?
The best time to refinance is when rates dip low enough to save you money on your mortgage — which is different for everyone. Experts warn against timing the market — waiting for rates to drop lower — in hopes of scoring an even better deal. If you want to save money on your mortgage and the rates are low enough for you to do so, it’s smart to lock that rate. Waiting could end up costing you money if mortgage rates suddenly jump, which they can do without warning.
Getting ready to refinance
What you will need to refinance
To refinance, you’ll need to apply for a new mortgage. Lenders will typically verify employment and run a credit check.
Documents you'll need:
Identification
Tax returns
Proof of assets, including bank statements and brokerage account statements.
Lender requirements vary, so talk to your lender about what sort of documentation you need to supply.
How to refinance
Start your mortgage refinance journey by shopping around for lenders with the lowest APRs. You’ll also want to find lenders you’re comfortable with. For example, would you like to work with your lender in person or is a completely online experience preferred? Talk to your bank to find out if existing customers qualify for refinance discounts. Once you’ve identified your lender, find out what paperwork you need. The faster you gather all the required documents, the faster the lender will be able to process your loan. Many lenders have remote technology in place, such as e-signatures and remote notarization.
How much equity do I need to refinance?
For a cash-out refinance, most lenders require that you have a minimum of 20 percent equity in your home. For a rate-and-term refinance, the equity requirement will vary by lender.
Guest Contributor: Bankrate.com