Now is the moment to refinance

The optimal timing to refinance your mortgage is contingent on a number of factors. Getty Pictures

You may be wondering if now is still a good time to refinance, given that interest rates have reached new highs. Good question.

Refinancing serves to replace your current mortgage loan with a new one. In addition to lowering your interest rate, a refinance offers a variety of other advantages. It is also useful for homeowners who wish to cancel their private mortgage insurance (PMI), modify their loan duration, or adjust other criteria.

Refinancing is not advantageous for all borrowers. It depends on your particular financial circumstances. If you believe a mortgage refinance might benefit you, you could start saving money immediately. Utilize an online tool for assistance with the process.

Here is the information you need to properly plan your mortgage refinance.

When is the most advantageous time to refinance a mortgage?

There is no hard and fast rule on when to remortgage. It depends on your budget, homeownership ambitions, and objectives. Looking to reduce your interest rate or monthly payment? Do you wish to repay your debt more quickly? Refinancing your mortgage could enable you to do both.

Here are some tips for when it may be prudent to refinance:

You can decrease your interest rate by at least 1 percent: Check the weekly rate updates provided by Freddie Mac and compare them to your own. According to the majority of experts, refinancing is worthwhile if you can reduce your rate by at least one percentage point. In some instances, a half-point may be advantageous, particularly for bigger loan sums (when even a fraction of a percentage can make a big difference in long-term costs).
You intend to remain in the home long enough to enjoy its benefits: Calculate your breakeven point, or the month in which you will recoup your closing expenses, to assess whether or not refinancing is worthwhile. If your refinance costs $5,000 and you save $150 per month, the payback period would be 33 months ($5,000 / $150). If you intend to remain in your home for at least 33 more months, refinancing is likely worth the cost.
You need cash and would likely use a credit card with a high interest rate if you did not have it: Consider a cash-out refinance if you anticipate upcoming spending that would normally be charged to a credit card. Typically, mortgage loans (including refinances) have significantly lower interest rates than credit cards and other financial products, so this technique can save you money in the long run. Additionally, many homeowners employ cash-out refinances to consolidate their credit card and other debts into a single loan payment.

Ensure that you shop around for mortgage lenders to obtain the most affordable offer.

If you decide to refinance, you should consider doing so at the end of the month. This will lower your closing costs because you will only be required to prepay interest for a few days. You may also want to consider refinancing around the conclusion of a quarter, when mortgage lenders may be trying to meet quotas (and potentially offer better deals to do so).

When should you avoid refinancing your mortgage?

Refinancing your mortgage may sound appealing in theory, but you must first determine if you qualify. Timing and the existing situation of your personal finances are crucial in this instance.

Here are several situations in which refinancing may not be the best option.

You just purchased a home: It is typically unwise to refinance immediately after purchasing a home. This is due to the fact that you are paying closing costs twice (which increases the breakeven point) and some lenders add prepayment fees. These are essentially penalties for prepayment of a home loan.
You are unable to obtain a lower interest rate: Refinancing could be unwise if you would be exchanging a low-interest rate for a considerably higher one. There may be circumstances in which it makes sense to boost your interest rate, but doing so will just increase your monthly expenses and interest charges in the long term.
You have a low credit score: If you have a bad credit score, you generally won’t want to refinance. Refinancing could provide you with fewer savings if you have a low credit score, as a result of higher interest rates. The best mortgage interest rates are typically reserved for individuals with credit scores above 740. However, there are ways to enhance your score.

Utilize a comparison tool if you are uncertain of the rate for which you qualify. Experts can provide estimates of how much your refinance may cost and how much you may save.

Three considerations before refinancing

Before considering a refinance, it is vital to evaluate a few factors.

You will be responsible for closing charges. Freddie Mac estimates that these fees are approximately $5,000 per loan, although the exact price will vary on your lender, loan amount, and geographic area. You can also roll these fees into your loan and repay them over time; however, keep in mind that doing so will increase your loan amount, monthly payment, and long-term interest costs.

Credit score: Refinancing can potentially temporarily lower your credit score. This is due to the fact that your lender will conduct a hard credit inquiry when evaluating your application. This causes a momentary reduction in your score (typically no more than five points). As long as payments are made on time, however, the credit score should rebound very rapidly.

Reverse mortgage: If a typical mortgage refinance or cash-out refinance does not sound advantageous to you, you should also explore a reverse mortgage. A reverse mortgage enables homeowners (62 and older) who have paid off their mortgage in whole or in large part to access a portion of their home’s equity.

The released equity, which is considered tax-free income, can be used to pay off debt or make property repairs. However, it must be reimbursed if the homeowner passes away or decides to sell the property. Ensure you understand the benefits and drawbacks of this solution before moving further.

If you believe that a reverse mortgage would benefit you, you may take the first step today by determining your eligibility.