Is now a good time to refinance? Reduce your mortgage payment with 2021‘s low rates

Dan Green
The Mortgage Reports contributor

Two things you should know about refinancing now

When mortgage rates drop, homeowners typically wonder: Is now a good time to refinance my house?

The short answer is probably ‘yes’ — especially if you keep these two things in mind when deciding whether to refinance: 

  • Getting approved for a mortgage is simpler and faster than it used to be, so it’s likely the refinance process will feel smooth and easy compared to your original mortgage application 
  • In general, you should refinance if it will save you money — and with current interest rates at historic lows, there’s a good chance it will
Verify your eligibility for a historic low rate (Oct 17th, 2021)

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Why now is a good time to refinance

For many homeowners, now is a great time to refinance. Today’s mortgage rates are still near record lows, creating opportunities for millions of homeowners to save on their monthly payments.

Consider that dropping your rate by just 1.0% puts about ten percent of your mortgage payment back into your pocket each month.

That means 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.

And low mortgage rates aren’t the only thing U.S. homeowners have going for them.

Dropping your mortgage rate by just 1% could save you $12,000 over the next 10 years.

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

It’s also good news for homeowners who made a small down payment a few years ago.

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

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

That’s why it’s important to check your own rates and see how much you could save.

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

Check your refinance rates today (Oct 17th, 2021)

Refinancing during coronavirus

The coronavirus pandemic has made it both easier and harder to refinance your home.

On one hand, COVID is the main reason for ultra-low mortgage rates. The pandemic has pulled the economy down, and a poor economy typically means lower interest rates for borrowers.

As long as COVID case numbers and unemployment are high, the low-rate trend likely won’t change. And even after the U.S. sees a meaningful drop in cases, the economy could take years to fully recover.

That means mortgage interest rates should stay low for the next year or longer, making it a good time to refinance throughout 2021.

But there’s a catch. Unless you are eligible for a Streamline Refinance, you may not qualify for a refinance unless you’re in a financially stable position. And COVID has weakened many Americans’ financial standing.

To qualify for a new mortgage — and a low rate — you need decent credit and stable income that’s expected to continue at least 3 years into the future.

Homeowners who have lost their job or seen a substantial income reduction due to the pandemic might not qualify to refinance right now.

If you find yourself in this situation, don’t lose heart. Historically low rates are here to stay for the time being. And it may be easier than you think to refinance after being unemployed.

Be patient, and make sure you keep an eye on your credit so you’re in a good position to refinance when your job stability improves. 

Is refinancing worth it?

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 it helps them 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.

Myth 1: You need to drop your mortgage rate by 1%

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 six times that amount.

Even a modest mortgage rate reduction can result in substantial monthly savings. So long as costs are held 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 than looking at interest rates alone. 

Myth 2: You need to ‘break even’ on your refinance 

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

However, this rule assumes you’ll pay closing costs out of pocket — which you don’t have to do.

If you can eliminate the upfront cost of refinancing, the break-even rule no longer applies. You start seeing ‘real savings’ right away.

There are a couple ways to refinance with low or no upfront costs.

  • Roll the closing costs into the loan amount. If you include closing costs in your loan balance, you’ll pay interest on them, which costs you more in the long run. But it eliminates the upfront cash barrier to refinancing
  • Ask for lender credits. A ‘lender credit’ means your mortgage lender covers all or part of your refinance closing costs. In exchange, you’ll pay a higher interest rate

Theoretically, both these methods save you money in the short run while costing you more in the long run.

However, mortgage rates are so low right now that many homeowners can accept a slightly higher rate or loan balance and still save money over the life of their loan.

If you choose one of these methods, you don’t have to worry about ‘breaking even’ — you only have to worry about your savings. 

Verify your refinance eligibility (Oct 17th, 2021)

Good reasons to refinance your home

Often, deciding whether to refinance is a matter of finding a refi program that meets your needs.

Today’s homeowners have a wide variety of loan options. Instead of taking the easy route and refinancing to a new, 30-year mortgage with the same lender, you should explore the different programs available to you.

The right choice will depend on your current mortgage and long-term financial goals. For example:

  • Is your current loan an FHA, VA, or USDA mortgage? If so, you may be able to use a Streamlined 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 tap home equity and use it for any purpose. Many homeowners cash-out equity to finance home improvement projects, 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 fixed-rate mortgage. This could help you pay off the loan sooner and save a bundle on interest. However, your monthly mortgage payments will be significantly higher than on a 30-year 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 can likely 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. A higher credit score, lower debt-to-income ratio, or increased home equity could all 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 historically low interest rate for the rest of your loan term

Homeowners who are “underwater” — meaning they owe more on their home than it’s currently worth — have options to take advantage of low mortgage rates, too. 

Fannie Mae’s high loan-to-value refinance might be a good option for homeowners looking for a lower rate, but who owe too much on their home to meet traditional lending requirements. 

Fannie Mae’s program replaces government-sponsored programs like HARP, which expired in 2018, and FMERR, which expired in 2019. If homeowners can drop their rate, there are few reasons not to refinance in this environment.

Check your refinance loan options (Oct 17th, 2021)

A “safe” refinance option: The zero-closing cost refinance

There’s a better way to know whether it’s time to refinance — better than the one percent method and better than the break-even method.

Can you save money and pay nothing out-of-pocket to do it? 

There’s a good chance you can, using a ‘no-closing-cost’ refinance.

No-closing cost mortgages are precisely what their name implies — they’re mortgages for which there are, literally, no closing costs. When there are no closing costs, there are no break-even points to consider, and no one-point savings to monitor.

If you can lower your mortgage rate and pay nothing to do it, it’s almost always a good idea to refinance.

The good news is that no-cost mortgages are readily available across all loan types including FHA loansVA loans, and conforming mortgages.

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 win-win situation, and you’ve paid nothing to get your refinance completed.

No-cost mortgages are available in all 50 states.

Are you eligible to refinance right now?

When you refinance your home, 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 Streamlined Refinancing, which has relaxed underwriting guidelines.)

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

But in general, here’s what you can expect a lender to look at when you apply for a mortgage refinance:

  • Credit score — A FICO score of at least 580 is required for FHA refinancing. Conventional and VA loans typically require 620 or higher. Minimum credit scores are often higher for cash-out refinancing
  • Credit report — Just like when you apply 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’ll 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 3-5 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.

What are today’s refinance rates?

Today’s refinance rates are at historic lows, and they’re expected to stay there for the foreseeable future. 

Instead of worrying about “saving one percent” or “breaking even,” you should think about how a refinance can benefit you.

Do you want to save money month-to-month? Do you need cash for a big expense? Do you want to pay off your mortgage and be debt-free sooner? A refinance can help with any of these goals.

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

Verify your new rate (Oct 17th, 2021)