It May Be Time to Refinance Your Mortgage

Mortgage rates have dipped to their lowest point since May 2023, averaging 6.59 percent according to a Bankrate survey. When rates are down, this opens new opportunities not just for new homebuyers, but also current homeowners. For many, it's time to consider a strategy that has been largely dormant in recent years: mortgage refinancing.

What is mortgage refinancing?

Mortgage refinancing is the process of replacing your existing home loan with a new one, typically to secure better terms or lower interest rates. This can potentially lower your monthly payments, reduce the length of your loan, or allow you to tap into your home's equity.

Deciding whether to refinance your mortgage

Lowered rates are one thing; the reality of refinancing is another. Let's take a look at some key pros and cons of mortgage refinancing.

Pros of refinancing

• Lower monthly payments: A lower interest rate can significantly reduce your monthly mortgage costs.

• Shorter loan term: You might be able to switch from a 30-year to a 15-year mortgage without drastically increasing your monthly payment.

• Cash-out option: Refinancing can allow you to access your home's equity for major expenses or debt consolidation.

Cons of refinancing

• Closing costs: Refinancing isn't free. You'll need to pay closing costs, which typically range from 2% to 5% of the loan amount.

• Long-term costs: While monthly payments might decrease, you could end up paying more over the life of the loan if you extend the term.

• Potential prepayment penalties: Some mortgages have penalties for paying off the loan early.

Is now the right time for you?

If your current rate is significantly higher than the new rates available, you might want to look into refinancing. You should also be planning to stay in your home long enough to recoup the closing costs. Another hopeful sign could be an improved credit score since you got your original mortgage, potentially qualifying you for better rates. If you want to switch from an adjustable-rate mortgage to a fixed-rate loan, you'll get more stability. Ultimately, it'll be a numbers game. Check out this mortgage refinance calculator from Bankrate to see if a refinance makes sense.

Tips for getting the best refinance rate

Refinancing your mortgage can potentially save you thousands of dollars over the life of the loan-that is, if you're able to secure a lower interest rate. Here are some tips to improve your odds.

• Improve your credit score: A higher credit score can qualify you for better rates. Pay down debts and correct any errors on your credit report. Here are more of our tips for boosting your credit score to put you in the best lending position possible.

• Shop around: Don't settle for the first offer. Compare rates from multiple lenders to find the best deal. Check out these tips for shopping lenders the same way you'd research a restaurant-especially if you want to give yourself the best shot at ordering something you'll enjoy.

• Consider paying points, or paying closing costs upfront: Paying more upfront can sometimes secure a lower interest rate, saving you money in the long run. Some lenders offer "no closing cost" refinances where they cover fees in exchange for charging you a higher interest rate over the life of the loan. To get the absolutely lowest rate, opt to pay all closing costs out of pocket. Closing costs generally run between 2-5% of the loan amount.

• Act quickly: While rates have dropped, there's no guarantee they'll stay low. If refinancing makes sense for you, don't delay.

The bigger picture

This dip in mortgage rates comes after a period of significant increases, with rates hitting a high of 8 percent in late 2023. The current average of 6.59 percent represents a notable improvement, especially for those who financed when rates were climbing.

However, it's crucial to remember that these rates are still higher than the record lows seen during the pandemic, when rates hovered around three percent. This means that while refinancing might not make sense for everyone, it could be particularly beneficial for homeowners who obtained mortgages during the recent rate hikes.

As with any major financial decision, it's wise to consult with a financial advisor or mortgage professional to determine if refinancing aligns with your long-term financial goals. They can help you calculate the potential savings and break-even point, ensuring that refinancing is truly in your best interest.

While the current dip in mortgage rates may not be a return to the ultra-low rates of the pandemic era, it does represent a significant opportunity for many homeowners. By carefully considering your individual circumstances and following the tips outlined above, you may be able to take advantage of this shift in the market.