Choosing when to refinance your mortgage is one of life's easier decisions. There's a mathematically "right" answer, so you don't have to debate with yourself, agonize over whether you made the right choice or beat yourself up later for getting it wrong. And, thanks to the online LendingTree Refinance Calculator, you don't even have to be good at math. You just key in some numbers, see how much you could save, decide whether it's worth the hassle and move forward.
Is Now the Time to Refinance Your Mortgage?
Unless you've refinanced very recently, now might be an ideal time to act. At the time of writing, mortgage and refinance rates are near their 2016 low – which means they're close to their all-time low. No wonder, during the last full week of July 2016, refinancings accounted for more than 60 percent of all mortgage applications, according to the Mortgage Bankers Association (MBA).
Might you do better if you wait awhile in the hope rates will go even lower? It's certainly possible. But experts are near-unanimous in forecasting rises ahead. In July 2016 (the latest figures available at the time of writing), the economists at Fannie Mae, Freddie Mac and the MBA were all predicting higher or steady rates in each quarter between now and the end of 2017, with the last reckoning the average for a 30-year fixed-rate mortgage could be up at 4.4 percent by the final quarter of next year.
The late Harvard economist John Kenneth Galbraith once observed, "The only function of economic forecasting is to make astrology look respectable." And the economists at Fannie, Freddie and the MBA would probably be the first to acknowledge that their predictions are far from certain. But, when so many leading experts have such a strong consensus, you may think it wise to act on their advice. After all, you can always refinance again if they're proven wrong, and rates do fall significantly further.
Your Basic Calculation
That refinance calculator should do the heavy lifting for you, and you should soon have a good idea of the amount by which your monthly payments should fall. Let's take a purely theoretical example, and say that number is $300.
You then need to guesstimate (for now) what your closing costs for the refinance are going to be. Those vary from state to state and lender to lender, but you might base them of what you paid to close when you bought your home. For the sake of our example, let's say they're $3,000. Now divide your closing costs by your monthly savings, and you'll have your break-even point – in our theoretical case that's ($3,000/$300=10) 10 months. Clearly, you'd make a loss if you sold up and moved before then, and the gain might not be worth the hassle if you moved within a year or so. But, after 10 months, you'd have $300 more a month to spend or save – every month.
You'd have that much more available to spend or save every month, but that doesn't mean you'd be better off over the long term. Suppose you've had your existing 30-year mortgage for five years, so it now has 25 years left to run. If you refinance to a new 30-year loan, you'll be resetting the clock and adding five years to the time before you're mortgage-free. Worse, because of how mortgages are amortized, a larger proportion of your monthly payments will go toward interest rather than paying down your "principal" (the amount you borrowed). So you're likely to end up paying more in total to refinance your home than if you'd stuck with your existing loan.
If money's tight at the moment, you might not care about that. After all, $300 a month now could be worth much more to you than some future cost you may hardly notice. But if you're doing well and have spare cash at the end of each month, you have the luxury of viewing your finances more strategically. And you might want to consider refinancing to a shorter-term loan – maybe one with a 15-year term. Even with your new lower rate, you'll likely pay more each month than you do now, depending on how long your existing mortgage has to run, but you should save money overall. Again, you can model your options by choosing a 15-year term when using that refinance calculator.
Easier to Get Approved to Refinance Your Mortgage
Following the credit crunch and Great Recession, many people found themselves unable to refinance because the lenders they approached were too picky, their credit was shot or their homes were underwater (they owed more on their mortgage than their home was worth). Some may have applied – perhaps quite recently – and been declined. But things are improving all the time.
Many lenders are slowly relaxing the criteria they use to evaluate borrowers' applications, average credit scores among American consumers are rising, and, with CoreLogic calculating average home prices rising 5.9 percent year over year in July 2016, the number of underwater homes is declining fast, though there are still some areas where there are too many.
With your chances of getting approved better than they've been for many years and rates near all-time lows, when, if not now, is the best time to refinance your mortgage?