Mortgage refinancings have been booming because of low interest rates.
In 2019 alone, buyers and refinancers took out more home loans than in any year since 2006, according to industry research group Inside Mortgage Finance.
The reduced rates also widen the pool of homeowners who could lower their monthly payments. Mortgage-data firm Black Knight Inc. estimates that 11.3 million U.S. homeowners would qualify for and benefit from a refinancing, the second-most on record. Average monthly savings would be $268.
So should you join the refi surge?
If it has been several years or more since you bought your home or since you last refinanced, there's a good chance your mortgage rate is more than one percentage point above current rates, which is usually a sign that it makes sense to refinance. But you may benefit from a refi even if your new rate would be less than a full point lower. It depends partly on how long you plan to stay in your home and how long it would take to recoup closing costs.
Keep in mind that closing costs for refinancing will typically run between 3% and 6% of your new loan amount, so knowing when you plan to sell your home is essential. Say you have a $300,000, 30-year, fixed-rate loan at an interest rate of 4.4% that you took out in 2014, and you're making a monthly payment of $1,688 a month in principal and interest. If you refinance to a 30-year loan with an interest rate of 3.0% and closing costs of 3% and finance the closing costs, you would lower your mortgage payment to $1,303, saving you $385 per month. You could break even and begin saving after a bit more than three years. If you sold your home in 10 years, you would save a total of $17,457.
If you have a 30-year loan but plan to sell your house in a few years, refinancing to a five- or seven-year adjustable-rate mortgage (ARM) could enable you to save even more money. You could also choose a no-cost refinance, in which your mortgage lender pays the closing fees, but that would require you to pay a higher interest rate.
Need help crunching the numbers? Use The Mortgage Professor's refinance calculator (www.mtgprofessor.com) to enter the details of both your current mortgage and your new loan to see how long you'd have to stay in your home to start saving money on a refi.
