Here's when you should seek out a new loan, according to a financial expert. 

By Erica Sloan
January 28, 2021
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Last year's record-low mortgage rates (which plummeted south of three percent by December) inspired a wave of mortgage refinancing. And for good reason: A lower average rate bodes well for those looking to secure new rates of their own and save money in interest. As the vaccine makes its rounds and we find our economic footing, rates are expected to inch back up again—but until then, while they remain at rock-bottom, it's smart to give your mortgage a close look and consider seeking out an adjustment.

"There are millions of people right now paying more on their mortgages than they should be," says Tendayi Kapfidze, VP and chief economist at Lending Tree. "If the thought of refinancing has crossed your mind, it's likely worth exploring." The good news is it isn't as daunting as it seems. "The process is more streamlined than it once was, plus there are digital tools available to the consumer, and substantial borrower protection," Kapfidze adds.

Here, he shares the main elements you should take into account when determining whether a refinance makes sense.

Your Financial Picture

It's important to remember that the average interest rate is just that—an average, says Kapfidze. "That means half the people out there are getting higher rates, and half are getting lower, and depending on your finances, you could fall into either group." Which is to say: If the average doesn't seem low enough on its face to warrant a refinance, don't rule it out quite yet. For instance, if you've been paying your mortgage on time for a while, or your home's value has increased (lowering your loan-to-value ratio), or your credit score has risen by 50 or more points since your first go-round, you may very well nab a rate even lower than the average. And it doesn't have to be that much lower to be worth it in the long run; a drop by even half of a percentage point could garner substantial savings over time, says Kapfidze.

The Length of Time Living in Your Home

Make sure that you're planning to stay in your house long enough to recoup the closing costs of the refinance (this is called your break-even point) and start benefitting from the lower rate you've worked so diligently to get. Divide your closing costs by the amount you'll be saving each month in interest to calculate the number of months you'd need to stay in your house to reap the rewards; or just plug your info into the mortgage calculator on Lending Tree's website. Because the total amount you can save is directly dependent on how much you spend upfront in closing costs, Kapfidze suggests shopping around for several quotes from well-known lenders in your area and factoring the fees—not just the rate—into your final pick.

Your Savings Goal

Think about whether you'd prefer to have more money in your pocket now, or to save more over time. If the former applies—perhaps you need to front a major expense like a child's college tuition or come up with funds for a new business—consider cash-out refinancing, which allows you to access a portion of your home's equity as spending money. This can also be helpful if you have other debts with higher interest rates than your mortgage, like credit-card debt, or student or auto loans, which are more important to pay off promptly.

That said, Kapfidze does not suggest a cash-out refinance if you'll need the money for day-to-day expenses, as that creates a slippery slope to accruing more debt. In this case, look into ways to reduce daily expenditures or consolidate debt, and seek out a traditional refinance with a rate low enough that you'll be able to cut down your monthly payment. 

If, on the other hand, you fall into the latter camp and are okay sticking with your monthly payment (or even raising it) so long as you can save long-term, consider refinancing into a shorter loan. For example, if your current mortgage has a 30-year term, and you switch to a 15-year one at a lower rate, you'll end up paying a similar amount (or slightly more) each month—but you'll also complete it in half the time, meaning you'll pay far less in accumulated interest over the life of the loan.

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