Dropping Mortgage Rates Drive Borrowers to Refinance. Should You?

Refinance volume jumped last week. Should you get a new home loan?

Back in October, refinance lenders saw less activity as higher mortgage rates stopped existing borrowers from trading in their home loans for new ones. But last week, refinance demand rose 7% from the previous week, according to the Mortgage Bankers Association. That's probably due to the fact that mortgage rates dipped back down after rising during the latter part of October.

If you've had the same mortgage for years, you may be thinking of refinancing. But is now a good time?

Refinance rates are low

From an interest rate perspective, now's a great time to refinance a mortgage. As of this writing, the average refinance rate for a 30-year loan is 3.266%. You may be eligible for a higher or lower interest rate, though, depending on what rates look like in your corner of the country and your credit score.

What do your plans look like?

While today's refinance rates make the case for getting a new mortgage, whether it pays to do so will depend on your specific circumstances. If you think there's a chance you might move in the near term, then refinancing generally won't make sense.

Why does it matter whether you'll move or not? When you refinance a mortgage, you're charged closing costs on that loan, just as you're forced to pay closing costs to finalize a mortgage for a home you're purchasing. You'll need to make sure you intend to stay in your home long enough to recoup your closing costs and actually enjoy some savings.

Typically, closing costs amount to 2% to 5% of a loan's total. Now, say you're refinancing a $300,000 mortgage and are charged 2.5% closing costs, or $7,500, to finalize that new loan.

In the course of refinancing, you might lower your monthly mortgage payment by $250. But based on your $7,500 outlay, it will take you 30 months to break even. You won't actually save money on your housing costs until your 31st month in your home. If you think there's a chance you might move out of your home before that 31-month mark, then you might want to reconsider refinancing.

Will refinance rates go up?

Mortgage rates can fluctuate from day to day, week to week, and month to month. Since rates have been so competitive since last year, it's fair to assume they're apt to start climbing at some point in the future.

But that doesn't mean we're looking at drastic hikes. Rather, rates may climb gradually. Since they're so competitive right now, it means you still have plenty of time to get a new mortgage that's affordable should you choose to go that route.

In fact, if your credit score isn't great, it pays to work on boosting it before applying to refinance. If that means waiting six months, so be it. You may end up with a slightly higher mortgage rate if you refinance in half a year's time. But if you're able to raise your credit score substantially between now and then, that alone could produce enough savings to more than make up for a slightly higher mortgage rate.