Is Now a Good Time to Refinance?

Is it a good time to refinance?

Is 2022 a good time to refinance? That depends on your situation. Even when mortgage rates hit 5% in April 2022, over 1.3 million homeowners were still in a position to refinance and save money.

Keep in mind that rates fluctuate all the time. And your potential savings depend on your existing mortgage rate as well as your credit score, home value, and other factors.

If you haven’t yet taken advantage of low rates, it’s worth checking your refinance eligibility. Getting a quote is free and if your current rate is above-market, there are still savings to be had.

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Is now a good time to refinance?

For many homeowners, it’s still a good time to refinance.

Current mortgage rates are no longer at record lows. But they’re still relatively low by historical standards. And, depending on when you closed on your current loan, you may be paying a higher interest rate than what you could lock in today.

Consider that dropping your rate by just 1% puts about 10% of your mortgage payment back into your pocket each month. So for every $1,000 you pay to your lender today, you could reduce your payment by $100. That’s $12,000 saved over the next 10 years — simply by doing a refinance.

Rates aren’t all that matters

There’s a lot more to gain from a refinance than a lower interest rate.

Home values are at an all-time high, which means home equity has increased for many homeowners. That’s good news if you want to tap your equity using a cash-out refinance.

It’s also good news for homeowners who are paying private mortgage insurance (PMI) or FHA mortgage insurance.

If your home’s value has increased while you’ve been paying down your loan balance, you might have enough equity to cancel PMI and save a few hundred dollars each month.

Refinancing into a conventional loan won’t require PMI when your new loan balance is at least 20% less than your current home value.

Is it worth the upfront cost of refinancing?

Of course, refinancing your mortgage isn’t a free ride. There are refi closing costs to pay, and you need to consider the long-term cost of starting a new mortgage.

That’s why it’s important to check your individualized rates and see how much you could save. A refinance calculator can help with the math.

Refinance rates vary by borrower and by company, so get quotes from a few different lenders to see how a refinance could benefit you.

Good reasons to refinance your home

Getting a lower interest rate is the most common reason to refinance. However, it’s not the only one. In a rising-rate market, there may be other reasons to refinance that make financial sense.

Refinance scenarios for 2022

• Is your current loan an FHA, VA, or USDA mortgage? You may be able to use a Streamline Refinance. This is typically the fastest, easiest way to lower your interest rate and monthly payment. Eligibility requirements are relaxed, and you likely won’t need a new home appraisal
• Do you need cash for a big expense? A cash-out refinance lets you borrow from your home equity and use the money for any purpose. Many homeowners cash-out equity to finance home improvements or renovations, consolidate debt, pay college tuition, or bulk up an emergency fund. Cash-out refinancing is available with conventional, FHA, and VA mortgages
• Do you want to pay off your home early? Consider refinancing to a shorter-term loan, like a 15-year mortgage. This could help you pay off the loan sooner and save money on interest. However, your monthly mortgage payments will be significantly higher than on a 30-year loan. You can achieve a similar result by paying extra on your current home loan
• Are you paying for FHA mortgage insurance premiums (MIP)? Homeowners with FHA loans are usually required to pay MIP for the life of the loan. But if you have at least 20% equity and a 620 credit score, you could refinance into a conventional loan with no PMI and lower your mortgage costs
• Have your personal finances changed? If your financial situation has improved, you might qualify for a much better interest rate and loan program than you were initially approved for. Paying off a student loan or credit card debt can result in a higher credit score and lower debt-to-income ratio. Also, increased home equity can help you qualify for a lower-cost mortgage loan
• Is your adjustable-rate mortgage about to reset? If the fixed-rate period on your ARM is nearly up, it’s an excellent time to refinance into a new fixed-rate mortgage. You could lock in a fixed interest rate for the rest of your loan term

In addition, home values are still rising across most of the country. So homeowners who had very little equity previously — and even some who were underwater — may now be eligible to refinance.

If you’re not sure whether you’d qualify, talk to a lender. You might be surprised how much your home’s value has risen over the last couple of years.

Are you eligible to refinance right now?

When you refinance, you typically need to complete a full mortgage application and go through the underwriting process — just like when you bought your home. The exception is for government-backed Streamline Refinancing, which has relaxed underwriting guidelines but works only if your new refinance is the same type of loan as your original mortgage.

Refinance guidelines vary by program. For instance, FHA and VA loans are generally easier to qualify for than conventional mortgage loans.

In general, here’s what you can expect a lender to look at when you apply for a mortgage refinance.

Requirements to refinance

• Credit score: A FICO score of at least 580 is required for FHA refinancing; conventional loans and VA loans typically require 620 or higher. Minimum credit scores are often higher for cash-out refinancing
• Credit report: Just like when you applied for a home purchase loan, lenders want to see a clean credit report with on-time payments and no delinquent accounts
• Home equity: If you have at least 20% home equity, you might be eligible to remove mortgage insurance when you refinance. If you have more than 20% equity, you might be eligible to take cash-out at closing
• Loan-to-value ratio: Your loan-to-value ratio (LTV) helps determine whether you’re eligible to refinance. It also determines how much equity you can cash out. Most lenders cap the LTV on a cash-out refinance at 80% (meaning you must leave 20% of your equity untouched)
• Existing debts: Your debt-to-income ratio (DTI) will help determine which refinance programs and rates you qualify for. Try to avoid taking on new debts (like an auto loan or personal loan) before refinancing

These criteria also help determine your mortgage rate. The stronger your personal finances, the lower your new rate will be — and the more you could save.

Mortgage lenders are allowed to set their own eligibility requirements. So if you think you’re qualified to refinance and one lender denies you, try again with a different company.

You should also compare Loan Estimates from at least three to five lenders before choosing one for your refinance. That’s the only way to find your lowest refinance rate and maximize savings on your new home loan.

Is refinancing worth it in 2022?

There’s no simple answer to the question “is refinancing worth it.” That’s because “‘worth it”’ can mean something different for each homeowner.

For one person, refinancing for a lower monthly payment might be worth it — even if it increases their total interest cost. For another person, refinancing into a higher monthly payment might be worth it if they can pay off their mortgage faster.

So it doesn’t always make sense to follow conventional wisdom about refinancing. Common advice like “you need to lower your interest rate by 1% or more,” might not actually apply in your situation.

Here are two of the most commonly-held beliefs about refinancing — and why they’re often wrong.

Do I need to drop my rate by 1 percent?

The “saving one percent” argument is a holdover from the 1950s when closing costs were big, loan sizes were small, and homeowners lived in homes for many decades.

Back then, when loan sizes were typically less than $60,000, a homeowner had to lower their mortgage interest rate at least one percent to save $1,000 annually.

At today’s loan sizes, the typical refinancing homeowner can save many times that amount.

Even a modest mortgage rate reduction can result in substantial monthly savings. So long as closing costs are kept low, even a 0.25% rate reduction can be worthwhile.

If you’re considering a refinance, don’t look at your new interest rate in a vacuum. Consider how much you’ll save each month, how much you’ll save over the loan’s term, and how much you need to pay in closing costs to get that new rate.

Looking at the full picture will give you a much better idea of whether refinancing is worth it, rather than looking at interest rates alone.

Do I need to ‘break even’ on my refinance?

Another reason homeowners pass on a refinance is that they think they’ll never recoup their closing costs.

This is based on an approach known as the “break-even method,” which states your savings need to ‘break even’ with the amount you spend to refinance on closing costs.

For instance, if your refinance costs $5,000 and saves you $200 per month, it would take 25 months for your savings to balance out your closing costs. According to the break-even method, you wouldn’t start seeing ‘real savings’ on the new loan for two years.

But few homebuyers know exactly how long they plan to keep their home. Unless you know for sure you’ll sell the home before your break-even point, refinancing could still be a good idea if you’re setting yourself up for long-term savings.

It’s also possible to avoid paying closing costs out of pocket. We’ll discuss those types of loans below.

The zero-closing cost refinance: Save money and pay nothing upfront

No-closing cost mortgages require no upfront closing costs.

When you can lower your mortgage payment and pay nothing upfront to do it, refinancing seems even more attractive, regardless of your break-even point.

Lenders offer no-cost refinance loans for all loan types including FHA loans, VA loans, and conforming mortgages.

No-cost refinances are convenient, but they’re not exactly what they seem. In exchange for dodging the upfront costs, you’ll pay more in interest over the life of the loan.

In general, for loan sizes of $250,000 or more, you can get a zero-closing-cost mortgage by increasing your mortgage rate by 25 basis points (0.25%). For loan sizes over $400,000, the typical increase is 12.5 basis points (0.125%).

The extra bump in your mortgage rate creates more value for the lender. The lender then uses this extra value to pay your loan’s closing costs on your behalf. It’s a good choice for borrowers who can’t possibly afford the closing costs but could benefit from a refinance.

Alternatively, you can typically roll the closing costs into your new loan balance. This increases your loan balance — and therefore your overall cost — but it’s often cheaper in the long term than increasing your rate.

Mortgage refinancing FAQ

What are today’s refinance rates?

Today’s average refinance rates are still low by historical standards, but they’re higher than the record low rates of 2020 and 2021.

Your new rate will depend on your borrowing credentials and your willingness to shop around with multiple refinance lenders. If your new loan can save you money or help you achieve another financial goal, it’s still a good time to refinance.

Check your rates and loan options to see what a refinance can do for you.