BBB Tip: Should you refinance your home for a lower mortgage interest rate?
According to Freddie Mac, the average 30-year fixed rate mortgage (FRM) hit 2.65 percent in January 2021. That means it’s the lowest it’s been in decades. Many homeowners are rushing to take advantage of record-low rates to refinance their home, in hopes of saving money or increasing their monthly cash flow. The following tips can help you decide whether refinancing your home is the best option for you.
What does it mean to refinance?
Refinancing your home is when you replace your existing mortgage with a new loan. According to ConsumerFinance.gov, there are three main reasons homeowners choose to refinance:
- To secure a lower interest rate, which lowers their monthly payments.
- To shorten the duration of the mortgage - for example, going to a 15 year note instead of a 30 year note.
- To get an adjustable-rate mortgage (ARM) with better terms or to switch to a fixed-rate mortgage (FRM).
All of these are good reasons to refinance, but refinancing isn’t free. This means you’ll need to do some research to find out if refinancing will help you reach your financial goals.
What to think about if you’re considering refinancing
- Understand how mortgages work. The process of refinancing is essentially the same as when you took out your initial mortgage, which means you’re probably already familiar with the steps involved. Still, it’s a good idea to review key mortgage terms, the differences between FRMs and ARMs, and your rights as a consumer before you make any decisions.
- Determine if you are a good candidate for refinancing. A few indicators are: your credit or market conditions have improved since you first purchased your home, you want to pay more monthly on a shorter-term mortgage, or you currently have an ARM and your next interest rate adjustment will increase your monthly payments significantly. On the other hand, you may not be a good candidate if you’ve already had your mortgage for a long time, you plan to move soon, the value of your home has fallen, or your current mortgage has high prepayment penalty fees.
- Count the cost. Freddie Mac reports that the average cost of refinancing a home is about $5,000. You can expect to pay some or all of the following fees: an application fee, a loan origination fee, points, appraisal fees, inspection fees, attorney review/closing fees, homeowner’s insurance, survey fees, prepayment penalties, fees associated with loans insured by federal government housing programs, and title search and insurance. If these fees add up to more than what you’ll save with a reduced interest rate, refinancing may not be the best option for you. A refinancing calculator, like this one from the National Bureau of Economic Research, or this one from Nerdwallet, can help you decide.
- Shop around. Federalreserve.gov says that comparing pricses can save you thousands of dollars.” Be ready to spend some time reviewing your options. Don’t forget to talk to your current lender too. They may be willing to negotiate or match better rates to keep your business and they may be in a position to waive application or origination fees. Get all the information about each loan you consider in writing before you pay nonrefundable fees. Read each lender’s paperwork carefully and ask about anything you don’t understand clearly. These written terms will help you make a side-by-side comparison of your options as you shop around.
- Avoid getting scammed. Watch out for marketing materials and unsolicited calls with offers that sound too good to be true. Some ads feature low initial rates and monthly payments, without mentioning that those payments and rates can increase later on. In addition, lenders that offer “no-cost” loans may simply be rolling the closing costs into the loan and charging you higher interest rates, which could reduce your savings and ultimately cost you more over the life of the loan. Don’t give in to high pressure sales tactics and make sure you have all the facts before you sign up for anything.
For more information
Learn more about how mortgages work in the U.S. from the Consumer Finance Protection Bureau's mortgage answers. For information on reverse mortgages, see the BBB Tip: Understanding Reverse Mortgages.
Search for a reputable mortgage lender near you.
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