Mortgage Rates Are Still Near Record Lows. Is Now a Good Time to Refinance?

mortgage refinance 3000
Mortgage refinance paperwork. Shutterstock -- Shutterstock

With mortgage rates hovering around 3%, or even lower, now seems like a great time to refinance your home loan. But before you do, there are factors to consider.

Let's take a look at some of those so you can be equipped to make the right decision for your home loan.

How Much Will You Save When You Refinance?

The first thing that comes to mind when refinancing a house is how much you will save each month. Thankfully, that's easy to determine. Simply use a Department of Veterans Affairs loan calculator to enter your current loan information and the new loan data, then compare the two.

Most loan calculators can give you a quick overview of how much you will save when you refinance. Here is a simplified example:

Let's say you purchased a home with a 30-year VA Loan and took out a loan for $300,000 at 4.0% interest. Your monthly mortgage and principal payment would be $1,432.25.

Now, let's say you are going to refinance the same amount at 3.0% interest. Your new monthly mortgage and principal payment would be $1,264.81.

This would equal a savings of $167.44 per month, or $2,009.28 per year. If you make the minimum payments each month, you will save $60,278.40 over the course of your loan.

How Much Will It Cost to Refinance?

There are many fees associated with refinancing your home loan. According to Freddie Mac, the average closing costs on a home loan refinance come to $5,000.

The most common closing costs include lender origination fees and underwriting costs, document fees, credit score fees, appraisal fees, title services, state and local fees, and any points you buy to decrease the interest rate, if applicable. VA loans may come with a VA Loan funding fee, while some conventional mortgages may come with other fees, such as private mortgage insurance (PMI) or the new adverse market fee.

Thankfully, you can avoid some of those refinance fees if you refinance a VA Loan using a streamline refinance, or Interest Rate Reduction Refinancing Loan (IRRRL).

For example, you do not need to pay for a new appraisal with a streamline refinance. VA Loans are also exempt from PMI and the adverse market fee. All three of those fees may apply to borrowers refinancing a conventional mortgage.

Homeowners refinancing with a VA Loan may be required to pay the VA Loan funding fee. However, this is waived for veterans with a VA service-connected disability rating, as well as those who have received a Purple Heart.

When comparing loans, be sure to get a full accounting of the associated fees so you can compare the offers before you go through with the refinance. You can often roll the closing costs and other fees into your home loan, but be aware that doing so will increase the amount of your loan accordingly.

How Long Will It Take to Pay off the Refinance Costs?

This is the third step in the home refinance equation. Once you know how much refinancing your home loan will save you each month and how much it will cost to refinance your loan, you can run the numbers to see whether it makes sense to do so.

Let's use the same numbers we used above and assume the closing costs are around $5,000.

At a savings of $167.44 per month, it will take almost 30 months, or two and a half years, to recoup the closing costs.

If you will be in the house for more than 30 months, it makes sense to go through with the refinance. If you believe you will be moving or selling your home within that time frame, it may not make sense to go through with the refinance.

Of course, this is a simplified example. Many factors will come into play, including the actual amount you will save each month, your actual closing costs (if any), and other factors.

How to Get the Best Rate When Refinancing Your Home Loan

Home loan rates are based on many factors, including your credit score, the amount of your loan, the location of the home, how much equity you have in the home, and other factors.

Make sure you work on your credit score prior to getting loan quotes. The better your score, the more likely you will be able to receive a favorable interest rate.

Finally, it's always a good idea to get several quotes when you refinance your loan. You can get started here.

Take the Next Step

If you're ready to move forward, or just want more information, the first step is to get no-obligation rate quotes.

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Personal Finance