By Chris Taylor
NEW YORK (Reuters) - It may not quite be the famous question of Shakespeare’s Hamlet, but it is something very much on the minds of U.S. homeowners these days: To refi or not to refi?
Judging from the latest numbers, there is a lot of pent-up demand for Americans looking to refinance their home mortgages.
In fact, refi applications recently jumped 20% in a week, according to the Mortgage Bankers Association, and accounted for 56% of all mortgage applications.
Average rates on 30-year mortgages approached 8% last November. They stood at 6.4% on Tuesday, according to Bankrate.
Federal Reserve Chair Jerome Powell has signaled that more Fed cuts are on the way, now that inflation is back down to manageable levels, which should trickle through the financial system.
For homeowners, that potentially means big savings.
Yet refinancing can be an intense process – in terms of time, documentation and fees. You can expect that costs will be in the region of 3-6% of the loan principal, according to lender Freddie Mac.
And keep in mind that if you secured your mortgage years ago, your existing rate is likely below where rates are right now.
So how much of a rate differential makes a refi truly worth the hassle?
“The general rule of thumb is a 1-2% rate reduction for refinancing to be worthwhile,” says Matt Vernon, head of consumer lending for Bank of America.
The interest rate is just one element of the refi decision. Here are a few factors to help you make that call and close the deal.
DO NOT TRY TO TIME IT PERFECTLY
Trying to time mortgage rates is like trying to time the stock market: You are never going to get it exactly right.
So when you are offered an attractive rate that makes financial sense for your situation, do not overthink it. If rates continue to fall, you can always consider refinancing for a second time later on.
“For homeowners who are trying to time things perfectly, there is no point in waiting another year for rates to drop by (another quarter of a percentage point) when they are moving so much on individual days,” says Daryl Fairweather, chief economist for real estate brokerage Redfin (NASDAQ:RDFN). “Rates will continue to come down – but it’s going to be a bumpy ride.”
FOCUS ON THE TERM, NOT JUST THE RATE
A lower mortgage rate is one factor in the refi equation. But if you are stretching out what you owe, you could actually be adding to your total bill.
“Refinancing a 30-year mortgage for a home bought five years ago with a new 30-year mortgage today overstates the monthly savings,” warns David Flores Wilson, a financial planner in New York City. “The new mortgage will have five additional years of payments.”
Instead, think about taking advantage of lower rates to tighten up the term – say to 15 years, instead of 30. For your retirement years, owning a home free-and-clear 15 years ahead of schedule can be a game changer.
Says Jorie Johnson, a financial planner in Brielle, New Jersey: “We are seeing a lot of interest in refinancing to a shorter term at a slightly lower interest rate, and saving a lot of total interest paid over the term of the loan.”
CONSIDER THE PURPOSE
There are other reasons why a refinance might make sense for you.
For instance, you may have built up significant equity in the property amid the robust real estate market over the past few years. National home prices are hitting all-time highs, according to the S&P CoreLogic Case-Shiller Index.
That would allow you to do what is called a "cash-out refi," tapping some of that value to pay for a project like a much-needed renovation.
And if your credit score is up considerably since you originally took out the mortgage, that will lower the mortgage rates you will see from lenders.
SHOP AROUND
To truly maximize the moment of declining rates, do not just interact with your current loan servicer.
“These days there are so many tools online, where you can see multiple quotes at the same time,” says Fairweather. (Among them: LendingTree, NerdWallet, Bankrate, WalletHub and GoBankingRates.)
“My best advice is for people to look beyond their own bank, and wherever they happen to have their checking account," Fairweather notes. “That is likely not where you are going to get the best rate.”