Millions of borrowers refinance their mortgages when rates hit all-time lows in 2020 and 2021. Doing so allowed them to lower their interest rates and monthly payments. Some borrowers chose to extend their loan term, while others decided to pull equity from the home. 

People hesitate to take this step today as interest rates are significantly higher. They seek help from a loan officer to determine if now is the right time to refinance, and they must consider several factors. 

Current Rates

Homeowners should look at current rates and determine whether now is the time to refinance. Experts say a person should refinance when doing so will drop their interest rate by one or two percentage points. The bigger the loan, the smaller the percentage can be while still seeing a drastic drop in monthly payments. 

Credit Score

When people see a significant jump in their credit score, they should consider refinancing their home, mainly when they have a conventional mortgage. FHA, VA, and USDA loans rely less on credit scores. A small change in the credit score can lead to significant savings on interest over the life of the loan.

Home Equity

When a person has equity in the home, they may be able to get better refinancing . This equity allows the lender to take on less risk, and the borrower may not need to purchase private mortgage insurance. Many owners build equity by holding onto their homes until they increase in value to benefit from this equity. 

Loan Term 

An owner might want to refinance to change their loan term. They may want to move from a 30-year loan to a 15-year loan or vice versa. Long-term options often come with lower rates, and the owner can invest the difference. The owner might want to refinance to a longer term to lower their monthly payment and benefit from a lower interest rate. 

Rate Type

A person might also wish to refinance from an adjustable to a fixed-rate mortgage. This option works best when the person knows they will move before the rate adjusts. People might also want to make this move to avoid concerns about future increases. 

Cash-Out 

Owners can cash out and tap into their home’s equity. With this option, the mortgage balance increases, but the owner will have cash in hand. They may use this cash for home renovations, college tuition, or other significant expenses. The rate with a cash-out re-fi is often less than they would pay when using different options. 

The Break-Even Point

Many homeowners work with a loan officer to determine the break-even point. How long will it take to recoup the costs associated with refinancing? Financial experts refer to this as the break-even point. Divide the cost of refinancing by the monthly savings to see how long it will take to break even. If a move is planned before the break-even point, skip refinancing. 

When to Refinance? 

People often put off financing because they think rates will drop more. Timing the market is challenging. Experts suggest refinancing immediately, as rates could go up. Every month the homeowner puts off refinancing, they pay more than they must for the mortgage. Look for low-cost or no-cost refinance options, as refinancing again if rates drop significantly remains open. However, rates may be higher with low-cost or no-cost refinance options, so consider this when comparing mortgage offers. 

Homeowners need to consider all factors when deciding whether to refinance. They also need to understand their goals and future plans. With this information, they can shop around for a refinance loan and ensure the right product is selected.