Timing a refi is always tricky, but the time may indeed seem ripe for one, since according to Freddie Mac’s most recent Primary Mortgage Market Survey released Aug. 22, the average 30-year fixed interest rates have fallen to 3.55%—the lowest rate in nearly three years.
“Now can be a great time to refinance for many Americans who currently have a mortgage rate above 3.5%,” Sam Khater, chief economist at Freddie Mac, told realtor.com.
“In fact, households that refinanced in the second quarter of 2019 will save an average of $1,700 a year, which is equivalent to about $140 each month,” he adds. “With mortgage rates moving even lower in recent weeks, it’s possible for homeowners to reduce their monthly mortgage payment even more.”
The number of home refinance applications is up 167% from a year ago, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending Aug. 23. Refinances accounted for 62.4% of mortgage activity this past week.
But whether refinancing is the best option for you depends on several factors. Here are some questions to consider before you refinance your mortgage.
Will mortgage interest rates remain low, or rise?
Interest rates may be low now, but there’s uncertainty over how long it will continue, says Tendayi Kapfidze, chief economist at LendingTree.
“The future path is uncertain,” Kapfidze says, “as much of the change is driven by political considerations around the trade war that no one can predict with any confidence.”
With the flux, it may be important to act swiftly. Waiting for an even lower rate could be risky, and homeowners may miss a golden opportunity to refinance, he explains.
“If it lowers your monthly payment and your lifetime interest—or can give you the opportunity to access equity for other life events—it’s a good thing to consider,” Kapfidze says.
Comparing different rates from different lenders will help you get the best deal. For example, a LendingTree analysis revealed that comparing mortgage rates results in average savings of more than $53,500 over the life of a loan.
What’s your credit score and loan-to-value ratio?
Several factors go into determining the actual interest rate offered an individual borrower, says Chris Kemp, vice president of sales at Flagstar Bank in Troy, MI.
“It’s impossible to quote a rate without having a conversation with the borrower,” he says.
“Loan-to-value ratio means how much are you refinancing based on the value of your home,” Kemp says. “If your home is appraised at $100,000, and you’re refinancing $80,000, you have an 80% loan-to-value ratio.”
The higher this ratio, generally the higher your interest rate. “Your interest rate is going to be higher than if your loan to value is 60%,” Kemp adds.
How much will it cost to refinance?
In the same way that getting a mortgage comes with closing costs, there are costs to refinancing too. The costs vary, but homeowners need to factor how much they’ll have to pay upfront to refinance, says Ilyce Glink, author of “100 Questions Every First-Time Home Buyer Should Ask” and publisher of personal finance and real estate site ThinkGlink.com.
“How much will that refinance cost? How quickly will you pay it off?” she says. “If you can pay off the cost of that refinance in two years or less, and you plan to own the property at least that long, most experts would tell you to go ahead and refinance.”
Kemp urges homeowners looking to refinance to talk to their lender about the exact terms, conditions, and costs.
“Ask for a refinance quote with costs and without costs so you know exactly what fees you’re paying,” Kemp says. “Lower interest rates can come at a cost.”
Will refinancing offer a ‘net tangible benefit’?
Refinancing may be a great option if there’s a “net tangible benefit to the homeowner,” Kemp says, and if the owner plans to stay in the home for a while.
Glink says that a “home run refinance” allows the homeowner to lower the interest rate, lower their monthly payment, shorten the loan term, and have the ability to pay off the refinance in two years or less.
“If you can answer yes to all four of these rules, then your refinance is a no-brainer,” Glink says. “But it may be worth doing even if you can only get two or three of them. It depends on your personal finances.”