Should you refinance your mortgage? (2024)

FAQs

Is it a good idea to refinance a mortgage? ›

Refinancing your mortgage could make sense for many reasons, including lowering your interest rate, taking cash out or switching to a fixed-rate mortgage. For most borrowers, the ideal time to refinance is when market rates have fallen below the rate on their current loan.

Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.

The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.

The Federal Reserve has indicated it could cut interest rates three times next year, and as mortgage rates tend to follow the same trajectory as the Fed's rate, those are expected to fall, too. According to the Mortgage Bankers Association, the average rate on 30-year mortgages could reach 6.1% by the end of 2024.

You Already Have A Low Fixed-Term Rate

If rates are lower than what your rate on your current mortgage is, it might seem like a no-brainer to refinance. But if your rate is already relatively low and current rates aren't significantly lower than yours, you might not end up saving as much money as you thought you would.

Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.

You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.

Negatively Impacting Your Long-Term Net Worth

Refinancing can lower your monthly payment, but it will often make the loan more expensive in the end if you're adding years to your mortgage. If you need to refinance to avoid losing your house, paying more, in the long run, might be worth it.

Your Monthly Payment Could Increase

If you refinance from a 30-year mortgage to a 15-year mortgage, your payment will likely increase because you are shortening the amount of time you have to pay off your loan.

Does refinancing actually save you money? ›

Depending on what kind of loan you are eligible for, refinancing might offer you one or more benefits, including: a lower interest rate (APR) a lower monthly payment. a shorter payoff term.

Refinance closing costs commonly run between 2% and 6% of the loan principal. For example, if you're refinancing a $225,000 mortgage balance, you can expect to pay between $4,500 and $13,500. Like purchase loans, mortgage refinancing carries standard fees, such as origination fees and multiple third-party charges.

After all, higher rates equate to higher minimum payments. So, you may be wondering if, and when, mortgage rates might fall to 3% or lower again - and whether or not it's worth waiting to buy a home until they do. Although rates could fall to 3% again one day, it's not likely to happen any time soon.

The general consensus among industry professionals is that mortgage rates will slowly decline in the last quarter of 2024. The projected declines have shrunk, though, in recent months. At the start of the year, for instance, Fannie Mae predicted rates would drop to 5.8%.

As of May 17, 2024, the average 30-year fixed mortgage rate is 6.83%, 20-year fixed mortgage rate is 6.44%, 15-year fixed mortgage rate is 5.96%, and 10-year fixed mortgage rate is 5.75%. Average rates for other loan types include 6.91% for an FHA 30-year fixed mortgage and 7.00% for a jumbo 30-year fixed mortgage.

Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.

Because refinancing involves taking out a new loan with new terms, you're essentially starting over from the beginning. However, you don't have to choose a term based on your original loan's term or the remaining repayment period.

Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender. Some servicers will offer lower interest rates to entice their existing customers to refinance with them, just as you might expect.