Here’s What You Should Know Before You Refi

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Real Estate

The refi market over the past year has been “hot,” as “rates have been low for a very long time now in comparison to past rate history,” explains Robert Painter, a mortgage broker at New American Funding in Corona del Mar, Calif. who says he has processed approximately 2,000 mortgage refinances. Indeed, some mortgage refi rates are around 2.5% (see the lowest rates you may qualify for here), and lenders refinanced 2.23 million home loans in the second quarter of 2021, which was an increase of 26% from a year earlier, according to data from ATTOM Data Solutions. So we asked Painter, and other mortgage pros, what they think people looking to refinance should know.

Is the current interest rate enough to actually save you money? Painter says that some homeowners bought in a low interest rate market as it is, so a refi might not make sense. One rule of thumb to see whether a refi makes sense, according to Holden Lewis, home and mortgage expert at NerdWallet, is that if you can save half a percentage point or, ideally, three-quarters of a percentage point or more, it may make sense to refi, assuming you plan to stay in your house for a while. “For example, today a borrower with excellent credit can get a 30-year mortgage at around 3%. If that describes you, you might benefit from the refinance if your current loan has a rate of 3.75% or higher,” he explains. Remember that extending your loan term may mean you pay more over the life of the loan; this guide will help you figure out how much you might save by refinancing.

Do you have enough equity in your home? “Typically you want at least 20% of equity to make a refinance a benefit. This means that the loan doesn’t have private mortgage insurance (PMI) and is typically an amount of equity in the house that gives the lenders the ability to lend to the borrower at the best interest rate without as much risk, so there’s a nice benefit to refinance usually,” says Painter.

Does the borrower make enough income to qualify in today’s strict lending environment? A debt-to-income ratio is how a lender judges your ability to repay the mortgage, and it is simply your monthly debt payments divided by your gross monthly income. The rough rule of thumb is that lenders don’t want to see a debt-to-income ratio that’s higher than 43%, though this can vary by lender.

Have you considered the costs and fees, and shopped around? It’s also important to consider the costs and fees of getting a loan funded and then decide whether it’s a worthwhile benefit for the borrower to refinance. “There’s more than one reason to refinance. Some people refinance to get rid of FHA mortgage insurance, but they should wait until they have 20% equity,” says Lewis. “Some homeowners refinance to shorten their loan term.” Whatever your reasons, Greg McBride, chief financial analyst at Bankrate, says when considering costs and fees, “get quotes from multiple lenders rather than just refinancing with your current bank. Shopping around can yield thousands of dollars in savings and closing costs,” says McBride.