Investor Alert

Dec. 3, 2021, 1:30 p.m. EST

More than 11 million people can still save money from refinancing. Here’s the $2,800-a-year reason you may want to do it, even if you recently refinanced

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Alisa Wolfson

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Experts expect interest rates to rise in 2022, but rates now are still near historic lows, with some 15-year refi rates near 2% and some 30-year rates near 3% . Seeing that, plenty of Americans have already refinanced, but a new analysis from mortgage data company Black Knight finds that 11.5 million Americans could still save money by refinancing their mortgages. The savings could be significant: An analysis by Freddie Mac found that the average household who refinanced a 30-year-mortgage last year “saved over $2,800 in mortgage payments (principal and interest) annually.” But not everyone will save, so here’s how to do the math to figure out if you should refinance now.

Who can benefit from refinancing their mortgage?

A lot of people may be able to, thanks to today’s low rates : “If you took out your mortgage more than one year ago, consider refinancing,” says Greg McBride, chief financial analyst at Bankrate. Indeed, “if mortgage rates have fallen one-half to three-quarters of a percentage point below the rate you have, it makes sense to look into refinancing,” he adds.

You should also consider how long you’ll be in the house, because you want to make sure you stay long enough to recoup the costs of the refi. “If you plan to move within the next 2-3 years, you may not earn back the costs of refinancing,” says McBride. Think about your financial situation too, as that will play into the rates you may get.  “If your credit has deteriorated or you’ve recently taken a pay cut, refinancing at today’s lowest rates is unlikely,” adds McBride.

What factors do lenders look at to determine the rate I’ll get on my refinance?

Refi lenders look at a broad picture of your finances, including your debt-to-income ratio, which looks at how much you owe each month versus how much you earn. “Lenders typically use a maximum debt-to-income ratio (DTI) of 43% of your before-tax income to qualify you for a refinance,” says Denny Ceizyk, senior staff writer for LendingTree. “However, if you have a credit score above 740, lenders may approve a refinance with a DTI ratio up to 50% for conventional financing, and even higher for FHA or VA loans,” says Ceizyk. To calculate your DTI ratio, divide your total monthly payments for alimony, child support, credit cards, student loans, car loans and other loans plus the new expected mortgage payment, all by your gross income.

In addition to DTI, lenders will look at your savings and credit score, which is very important in determining the rate you’ll pay for a refi, says Ceizyk. “While it’s true you won’t even be able to qualify for a refinance if the lender can’t verify you earn enough income to repay the loan, the refinance may not even be worth it if you’re offered a high interest rate due to a poor credit score,” says Ceizyk.

Will refinancing be worth the cost?

Don’t neglect the fact that refinancing isn’t free. McBride says the priciest closing costs are ironically, not even charged by the lender. “Title insurance, government taxes and fees and prepaid items such as funding an escrow account and prepaid interest tend to represent the bulk of the costs,” says McBride. Average closing costs tend to add up to roughly 2-5% of your loan principal, and according to 2021 data from ClosingCorp, the average closing cost for a refinance this year was $3,398 including taxes and $2,287, excluding taxes. In some cases however, borrowers may choose a no-closing-cost refinance, meaning they don’t have to pay any out-of-pocket upfront fees. While not having to shell out money at closing is certainly a perk of a no-closing-cost refi, it can also mean spending more. That’s because the extra fees may be being rolled into your new loan balance, or paid by the lender in exchange for a higher interest rate. 

How to find the lowest rate on a refinance

Get quotes from 3-5 lenders. “Do your shopping around in one day, if you can, and use an apples-to-apples comparison of loans at similar rates to better understand total fees and third party fees. The market moves fairly rapidly, so shopping in one day will give you the clearest picture,” says Jonathan Lee, senior director of mortgage sales for Zillow Home Loans. 

Preparing ahead of time is also helpful and doing simple things like gathering items your lender will likely ask for such as proof of income, tax returns and documentation of your last few mortgage payments can all make the process easier.

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