Refinance Rate Forecast: What Is Driving Mortgage Rate Change
The annual inflation rate came in it at 8.3% in April, according to the data from the Bureau of Labor Statistics. It still puts it at the level of the 40-year highs weve experienced the past few months. And thats bad news for refinance rates.
As inflation lingers longer than anticipated, the Federal Reserve has begun raising interest rates. On top of that, there is more trouble brewing for the global supply chain. Russias invasion of Ukraine and Chinas latest round of COVID lockdowns threaten to add to the rising inflation we are currently experiencing. And the impact these events have on inflation may not be felt right away. The pain of the April and March lockdown is not yet fully being felt in the manufacturing sector outside of China, Lindsey Piegza, chief economist at Stifel Financial told NextAdvisor.
Because of all of this, we could be stuck with high inflation for much longer than we want, which makes it more likely that the Fed will have to raise interest rates aggressively.
How To Compare Lender Refinance Costs
Whenever you submit a mortgage application, your lender is required by law to provide you with a Loan Estimate within 3 business days. This standardized 3-page document provides important information, including your estimated interest rate, monthly payment, and closing costs of your loan.
A Loan Estimate will help you compare costs across lenders and ensure there are no surprises. Again, we can show you which fees you should and shouldnt plan to pay in the mortgage process.
You Want A Lower Monthly Payment
If youre considering refinancing to make your monthly mortgage payments more manageable, its a good idea to weigh that convenience against the costs, as well.
Add up your specific closing costs and make sure that, even with paying those, your lower monthly payment is still worth it. If the amount you would save each month ends up going toward closing costs anyway, it might not be the right decision for you.
However, if that takes some of the pressure off your budget, and the interest savings over time are still large enough, theres a good chance its worth it.
Carefully consider your situation and run the numbers to see if refinancing makes sense for you. In the end, its about finding a solution that works for you.
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Are You Ready To Refinance Your Mortgage
If youâre wondering whether youâre ready to refinance, think about your goals for refinancing and evaluate your current situation.
Refinancing can be a good idea when:
- You can save money on your mortgage if you refinance to a lower interest rate.
- You expect to stay in the home for a long time. A key part of calculating your savings is determining the break-even point, which is when the money saved from refinancing equals the closing costs you paid. If you plan to own the home for longer than that, then youâre saving money.
- The value of your home has increased. If your homeâs appraised value has grown since you took out your original mortgage, then youâll have more equity to work with if you want to do a cash-out refinance or get rid of PMI.
- Your credit has improved. A higher credit score can help you get a better interest rate, which saves you more money in the long term.
- You have more income. If you got a new job or received a raise and can afford to make higher monthly payments, then you could consider refinancing to a shorter term and paying off your loan faster.
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Things To Look Out For When Refinancing
- Extending your loan term may cost you more money in the long run because youre paying interest for a longer period.
- The cost of refinancing may counteract the savings.
- Make sure your new loan terms make both logistical and financial sense for your future plans as a homeowner.
Many homeowners look to refinance their mortgage in an attempt to lower their interest rate or utilize their home equity. Market conditions may have changed, or youve decided youd like to pay off your loan sooner. Although there are different ways to refinance, youll find they all end with closing fees. Before moving forward, evaluate whether the cost to refinance is worth what youll have to pay during closing. If you decide a refinance is right for you, you can speak to a home lending advisor today.
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How Much It Costs To Refinance Your House
Refinancing closing costs typically come to 3% to 6% of your loan principal, according to the Federal Reserve. Thats $3,000 to $6,000 for every $100,000 borrowed.
To see how the numbers break down, take a look at this chart:
You may pay some additional fees, depending on certain factors:
- Discount points: You can pay a fee at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your new mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 3.5% and you pay $4,000 for two discount points, your new interest rate is 3%. You dont have to pay for discount points when you refinance, but its an option.
- Prepayment penalties: A mortgage prepayment penalty is a fee you pay the lender if you sell, refinance, or pay off your mortgage within a certain amount of time of closing on your initial mortgage usually three to five years. The Federal Reserve states that prepayment penalties usually cost one to six months interest, but it varies by lender. Also, not all lenders charge this fee.
- Mortgage insurance: If youre refinancing your conforming mortgage and dont have 20% equity in your home, youll keep paying private mortgage insurance. The Fed estimates PMI to cost 0.5% to 1.5% of your principal. FHA mortgage insurance costs 1.75% at closing, plus an annual premium. Youll pay a 0.5% funding fee to refinance a VA loan, and a 1% guarantee fee with a USDA mortgage.
How To Lower The Short
Now that you know the basics, lets get a little more advanced. Here are some tips that can help you maximize your savings by lowering the cost of your refinance:
Improve your credit score: Just like your initial mortgage, your is the key to qualifying for a better rate. Improving your credit score can help you get pre-approved for a lower rate, saving you thousands of dollars over the life of your loan.
Shop around: As weve discussed, there are a lot of lenders out there charging an arm and a leg for services you could get for free. . Take a look around, and price out different refinances before you commit. When your goal is to save money, doing a little research now can pay off later.
Keep in mind that shopping for mortgages can subject you to hard credit inquiries aka the type of inquiries that impact your credit score. The good news is that if youre shopping for a mortgage refinance, you have a 45 day window in which only one hard credit inquiry will impact your score.
Choose a no-closing-cost refi: A no-cost refinance does not free refinance. But it does mean that your closing costs are either rolled into your loan or covered by the lender through lender credits . But keep in mind, both of these options will affect the amount you spend in interest over time.
Negotiate your closing costs: Although most third-party fees are likely set in stone, those who charge lender fees may be willing to negotiate. It never hurts to ask if theres any wiggle room.
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Refinance To Lower Your Mortgage Rate
To determine if you can save money with a lower mortgage rate, use our calculator to compare the monthly interest savings against the cost to refinance. As most mortgage brokers and lenders will cover your legal costs, the main cost you need to worry about is your break of mortgage penalty, or prepayment penalty. This penalty is charged by your lender for breaking your mortgage contract early and is based on your original contract date, current mortgage balance, mortgage rate, and other factors.
Does It Make Sense To Refinance Your Mortgage To Invest
Current low interest rates make it very enticing to use your mortgage to invest, but does it make sense? Lets look at a $1 million home that currently has a $300,000 mortgage at a mortgage rate of 3%. You can borrow up to an additional $500,000, which your lender is offering at a refinance rate of 3% as well.
In order for you to break even, your investments will need to return at least 3% a year, every year, in order to pay your additionalmortgage interest. What investments will return 3% or more a year?
5-yearGovernment of Canada bond yieldsare well below 1%, while savings accounts and GICs also usually have low interest rates. In order to beat 3%, you will need to invest in riskier investments. On average, the stock market returns over 3% a year. If you borrow $500,000 by refinancing at 3% and you invest in the stock market, you wont have much room for error. Borrowing to invest is very risky, and with a mortgage refinance, you are putting your home at risk if you cant pay it back.
If the stock market does return 6%, then youll earn about 3% per year on your $500,000 investment. This would amount to $15,000 in profits every year after paying for interest, but this gain will certainly not be stress-free!
Other alternative investments that you can fund with a mortgage refinance include buying investment andrental properties, buying apre-construction condo, or even becoming aprivate mortgage investor.
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Understanding Your Mortgages Break
Once you calculate the cost of refinancing, determine how many years it will take to break even with the new monthly paymentor recover the costs of refinancing your mortgage. This break-even point is the date on which you can actually benefit from your new lower payment, rather than covering refinancing fees. To calculate your mortgages break-even point, follow these calculations:
For example, if youre refinancing a $300,000, 20-year, fixed-rate mortgage at 6% with a new 4% interest rate, refinancing will reduce your original monthly mortgage payment from $2,149.29 to $1,817.94yielding a monthly savings of $331.35. Assuming a tax rate of 22%, the after-tax rate would be 0.78, which results in an after-tax savings of $258.45 . Finally, if you encounter $9,000 in refinancing costs, it will take almost 35 months to recoup the costs of refinancing .
What Makes Up The Costs To Refinance
Lending money comes with the risk that the borrower may default on payments. Refinancing charges help lenders defray the risks involved. There are a variety of different fees that lenders might charge, including:
- Loan origination fee. This is a fee paid to the loan officer who ushers the loan application through the process.
- Loan application fee. The loan application fee is a general fee for filing the paperwork with the lender.
- Recording fee. Home loans are a matter of public record. Some communities charge recording fees to add this information to the public record.
- Attorney fees. If the lender requires an attorney to review the paperwork, they may charge a fee for it.
- Appraisal. The appraisal fee is paid to the appraiser or appraisal company that comes to the home to determine its value.
- Loan underwriting fee. The underwriting fee is another fee charged to the borrower for the processing of the loan application.
The list above is not comprehensive, nor do all lenders charge the same fees. Call around to find out how much a refinance would cost with various lenders. Ask them to list all closing fees and estimate the approximate closing costs. Many lenders allow closing costs to be rolled up into the loan amount, but if a lender requires you to pay the closing costs up front, you’ll need to know that.
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What Fees Do I Have To Pay When Refinancing
Home loan refinance costs will vary depending on your individual circumstances. Some common refinance costs to enquire about, though, are:
The overall costs will vary depending on which institution you are currently with, which institution you are going to and which state/territory you live in.
You can use our Loan Comparison Calculator to work out the difference in repayments between two loans. But you will also need to calculate the other fees and charges into your estimations.
S To Compare Mortgage Quotes
Follow these fine steps when you comparison shop for a loan. But lets start with the premise does comparison shopping matter? Yes. According to Stanford University researchers, you need at least four mortgage quotes to have a chance at getting the best deal. According to the Federal Reserve of Chicago, home loan comparison shoppers save thousands in lifetime costs in comparison to non-shoppers. Heres how to shop systematically for the best deal on a refinance.
1. Compare FairlyTry to get your quotes quickly this is important because mortgage rates can and do change several times a day. A Monday quote from Lender A cant be compared reliably to a Tuesday quote from Lender B. If the lender issues a Good Faith Estimate, it should indicate how long the quote is valid.
2. Narrow the FieldReview your mortgage quotes and pick two lenders with the most competitive pricing. Contact them both and discuss your home refinance. Go with the loan professional who is most responsive and who provides the best answers to your questions. Make sure youre comfortable with this person you may discuss sensitive topics , and youre trusting him or her with an expensive transaction.
Lets look at a simple example of how to calculate the breakeven point on two loans with different interest rates and closing costs.
Breakeven = $3,000 / $28,60 = 105 months or 8.75 years
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Switch Your Loan Type
Refinancing also gives you the chance to change your loan type. If you have an adjustable-rate mortgage , you may find that switching to a fixed-rate mortgage makes repayment easier to manage since youll now have a consistent monthly payment.
Switching to a fixed-rate mortgage also locks in your interest rate so it cant fluctuate over the life of your loan. If you can secure a lower interest rate now by switching to a fixed-rate mortgage, it can potentially save you a lot over the years.
Youve Decided To Refinance Now What
If you’ve decided to refinance, then its time to prepare for the paperwork necessary. Most of the documents that you needed for your first mortgage will once again be required for a refinance, including tax returns, W-2s and pay stubs. If youre self-employed or receiving alimony or child support, you may have to provide additional documentation.
If youre working with a specific lender, your loan officer will help you understand which documents you need and communicate a timeline. Youll be working with this person for several weeks, so be sure to choose a mortgage lender that you both trust and enjoy working with.
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How Much Does It Cost To Refinance A Mortgage
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
The cost to refinance a mortgage can range from 2% to 6% of your loan amount, depending on several factors including:
- The size of your loan
- Your lender
- Mortgage term
- Mortgage type
Before you refinance, consider how much youll have to pay in closing costs and compare that with how much the refinance could save you over time. The table below breaks down some typical costs to refinance.
Why To Refinance Your Mortgage
Refinancing your mortgage can mean saving thousands of dollars over the course of your loans lifespan. Heres why you might want to consider refinancing your mortgage:
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