Refinancing Your Mortgage Without Tears

Every refi comes with a little fear: You’ve heard it’s expensive and requires reams of paperwork. But there are a few ways to streamline the process.

Have you seen today’s interest rates? If not, let me be the bearer of good news: 30-year fixed rate mortgages are averaging 3.66% right now. 15-year fixed are averaging 3.15%. These may be (depending on the source) historic lows. But even if they’re not, they’re really good. And they may have you wondering if now is the time to refinance.

To answer that question, you have to answer a few others.

  • Do you have a mortgage with an interest rate at least a half point higher?
  • Do you have equity of at least 10% to 20% in your home?
  • Do you have a credit score of 720 and above – or a score that has improved substantially since you took out your mortgage?
  • Do you have an adjustable rate loan?
  • If you answered any of those questions with a yes, it’s time to at least look at a refi. The ultimate barometer of whether a deal will make sense for you will be, after you shop for a rate, whether you expect to stay in the home long enough to recoup the cost of the refinance. I’ll let a quick example do the talking: If you took out a $200,000, 30-year fixed mortgage in 2018 at an 4.5% interest rate, your monthly payment would be $1013 (without taxes and insurance). Refinance now at a rate of 3.66% and your new monthly payment could be $916 — a savings of $97 a month. If the refi cost 2% of the home price or $4,000, which is typical, you’d have to be in the home 41 months to break even. If you’re not planning on staying that long the deal isn’t worth doing. If you’re planning on staying longer, go ahead.

    Convinced? Here are some tips to make your refi as painless as possible:

  • Do your research. Shopping around for the best rate almost always pays. But don’t write off your current lender. Sometimes mortgage lenders offer a discount to current customers who refinance with them, so find out if yours does, and then compare their terms with the terms at other lenders. By sticking with your existing lender, you may also be able to get away with a “streamlined refi” which is more of a loan modification than a complete refinance. That can save you a significant amount in closing costs.
  • Look at overall costs. If you’ve been paying your mortgage for a long time – generally 15 years or more – it may not make sense to refinance over the long term. Your monthly payment will go down substantially, but at this point in your current mortgage, most of your payment is being applied to principal (for the first 15 years or so, the opposite is true – the bulk of your payment goes to interest). Refinancing, unless you do so into a shorter-term term loan, may mean building less equity.
  • Watch your credit score. Inquiries, like those that occur when you apply for a mortgage or car loan, can ding your credit score. But there’s a loophole in the formula that helps: If you confine mortgage loan shopping to a 30-day period, FICO will recognize that you’re shopping around for a loan and treat all the inquiries as one.
  • Be prepared to wait. There’s been a bit of a rush on refis because of the low interest rates, and banks are struggling to keep up. Refinancing applications have risen 183% since this time last year and hit the highest level of demand since June 2013 just this month. So understand that you may need to wait in line, so to speak. And if you face hurdles – your credit score isn’t high enough, or you don’t have enough equity – know that you still have time to work on those problems and refinance down the line. Interest rates are expected to for the next year.
  • With Rebecca Cohen

    Jean Chatzky

    Jean Chatzky