Is now a good time to refinance your mortgage?

Is now a good time to refinance your mortgage? To find the answer to this question, you'll have to run through this simple financial checklist.

The coronavirus pandemic has many Americans reevaluating their financial planning in order to grow their savings account. Unemployment rates are climbing, but there is one potential silver lining: mortgage rates periodically fall to record lows thanks to declining bond yields — but does that mean now is a good time to refinance your current home loan?

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In short, the answer is likely yes (as long as interest rates continue to hover in the 3% range). With the potential to secure a lower rate and cut the life of the loan, it may make sense to refinance.

However, having a full picture that includes both costs and savings can help you decide if now is a good time to refinance. Online marketplace Credible can help you compare mortgage lenders and loan rates to find the best refinance offers (with the goal of saving money in mind).

Is it worth refinancing your mortgage right now?

If the coronavirus pandemic has affected your personal finances, a home refinance could provide some relief. But before you make any major real estate moves — especially during the coronavirus pandemic — like a mortgage refinance, here are four ways to determine if now is a good time to refinance your mortgage.

  1. Compare mortgage lenders and loan rates
  2. Determine if you're actually saving money
  3. Consider closing costs
  4. Compare loan terms

1. Compare mortgage lenders and loan rates

If one of your main goals in seeking a mortgage refinance is finding the best loan rates, it pays to do some comparison shopping. When it comes to refinancing loan rates, mortgage lenders aren't all alike.

When comparing loan rates, don't be afraid to cast the net wide and consider traditional banks, credit unions and online refinance lenders. If you don't know where to start with sizing up mortgage rates, using a tool like Credible can make it easier. Credible finds the best refinance rates for you so you can choose the refinance loan that fits your needs.

(Note: Refinance rates also vary based on a homeowner's financial situation and credit score.)

HOW TO GET THE BEST MORTGAGE REFINANCE RATES

2. Determine if you're actually saving money

A mortgage refinance can make sense when interest rates are low but it's still important to do the math on how much you could save (See how a homeowner with a mortgage of $400,000 could end up saving more than $50,000 by refinancing their mortgage).

Your potential refinance savings can hinge on your new loan rate versus the old one, the length of your new mortgage term and how much you'll pay for closing expenses. Find your rate and estimated monthly payments now by inserting your personal information into this free tool.

For example: Say that you're five years into a 30-year mortgage that carries an interest rate of 4.56 percent. Your outstanding loan balance is $200,000 and you want to refinance to a new 25-year loan. If you qualify for a 3.10 percent rate, refinancing would save you $62 a month and $13,588 over the life of the loan. 

That's with paying $6,000 in closing expenses out-of-pocket. So in this case, a mortgage refinance could be a good option. But when the costs are higher or you don't qualify for the lowest mortgage rates, it could end up being a wash.

You can also use a savings calculator (keep in mind the cost of your refinance, the amount you'll save per month, and how long it will take you to recoup the money you put into your refinance) to determine if you're actually saving money by refinancing your mortgage.

HOW REFINANCING YOUR MORTGAGE CAN PUT MONEY BACK IN YOUR POCKET

3. Consider closing costs

Always ask mortgage lenders about closing costs and other fees upfront to save time and money. Closing costs are part of the home refinance process, the same as they are when purchasing a home.

According to Credible, it's typical to pay between 2 and 5 percent at closing for a mortgage refinance. You can learn more about closing costs and fees on Credible.com.

The break-even point is when you've saved enough money in interest by refinancing to justify the closing payments you made. Going back to the previous example, you'd have to pay on the new loan for 97 months to reach the break-even point and recoup the $6,000 in closing costs.

One question you may have is whether it makes sense to roll closing costs into a refinance loan. While your lender may allow that, there are pros and cons.

On the pro side, you're not paying these costs out-of-pocket so you save money initially. But rolling them into the loan can eat away at your monthly and long-term savings. In the example scenario, rolling the $6,000 in closing costs into the loan would cut your monthly savings down to $33 and your lifetime savings to $10,960. So you'd have to think carefully about where you most need or want to reap the benefits when trying to save on mortgage costs.

There are ways to refinance your mortgage without closing costs (or at least have them significantly reduced), including:

  1. Applying for a “no-closing costs” mortgage
  2. Closing at the end of the month
  3. Checking for Army or union discounts

THE BASICS OF NO-CLOSING COST MORTGAGE REFINANCING

4. Compare loan terms

The final piece of the refinance puzzle is choosing a new loan term. There are three scenarios here:

  1. Refinancing to a shorter mortgage term
  2. Refinancing into a longer mortgage
  3. Refinancing to a term equal to what's left on your existing mortgage

Choosing a shorter refi term could increase your lifetime savings since you're making fewer principal and interest payments. But it could raise your monthly payments significantly.

Once again, use Credible to see if you're saving money by refinancing your mortgage and changing loan terms. You can crunch the numbers here by entering some simple personal information into their free online tools.

EVERYTHING YOU NEED TO KNOW ABOUT MORTGAGE REFINANCE

Let's look once more at the previous refinance example. Instead of choosing a 25-year mortgage, assume that you choose a 20-year term instead. Your lifetime savings increase dramatically to $30,571. But your monthly payments also increase from $988 to $1,153, a difference of $165.

The pros of choosing a shorter-term are saving even more money on mortgage costs and clearing the mortgage faster. The con, however, is potentially ending up with a payment that's unsustainable for your budget.

If you have more questions about mortgage refinance, turn to Credible or contact a financial advisor who can walk you through the process.

Are refinance rates going down?

Record low mortgage rates have been the norm during the coronavirus pandemic, though those figures have ticked up slightly. Mortgage loan rates are based on housing market conditions based on location and mortgage lender, but it’s possible to get an average rate and payment based on the U.S. market data as a whole.

On September 17, the average rate for a 30-year fixed mortgage was 2.87%, according to Freddie Mac. The rate for a 15-year fixed mortgage dropped to 2.35%.

(Remember: Your credit score, income and financial situation can impact your loan rates.)

Check here to see the latest mortgage rates (as they do fluctuate).

REFINANCE YOUR MORTGAGE BEFORE RECORD LOW RATES DISAPPEAR

How to refinance your mortgage

Here are five steps you should take when refinancing your mortgage:

  • Step 1: Determine your property's value
  • Step 2: Compare loan rates from multiple mortgage lenders
  • Step 3: Decide if a refinance is a good option for you (by using a loan calculator)
  • Step 4: Collect required documents
  • Step 5: Review your loan estimate