Mortgage rates are falling. Ask yourself these 3 questions before refinancing

It wasn’t long ago that mortgage rates were rising towards 8%. Such was the case last November, in fact.

But, luckily, mortgage rates have been falling in recent months. And in September, they reached 6.09%, their lowest level since February 2023.

In light of this, you may be thinking about refinancing your mortgage if you have one at a higher rate. And if so, you should know that shopping around is a great way to save money on a new loan. Click here for our list of top mortgage refinance lenders to compare rates and loan offers.

But before you refinance, you’ll want to ask yourself these key questions to make sure it’s the right choice for you.

1. Do I plan to stay in my home for many more years?

Refinancing a mortgage could result in a lower home loan interest rate and lower monthly payments. But there is a cost to refinancing, or more accurately, numerous costs, from application fees to registration fees and everything in between.

All told, closing costs for a refinance could easily total 2% to 5% of the loan amount. For a mortgage balance of $200,000, that’s $4,000 to $10,000. So it’s important to make sure you plan to stay in the home long enough to recoup those fees and then get some financial benefit.

Let’s say you’re charged $5,000 to refinance your mortgage, but your new loan has monthly payments $200 less than what you’re paying now. That means it will take you 25 months of lower payments just to break even on your $5,000 expense.

If you expect to move in two years, refinancing won’t make sense. In fact, you will lose money in this case. But if you expect to be in your home for another 10 years, it’s a different story. In this case, after 25 months, you’re saving money every month you stay.

2. Is my credit score in good standing?

The higher your credit score, the more likely you are to qualify for a great refinance rate. So, before you apply for a new mortgage, check your credit score.

If it’s in the mid-700s or higher, you’re in great shape to not only get approved for a refinance, but also to get a competitive rate. If your score is in the 700s, you’re still in good shape, but a slight increase could mean you pay less interest on your new loan.

And if your credit score is below 700, you may want to work on giving it a more substantial boost before applying for a new mortgage. You can boost your credit score by keeping up with your debt payments and reducing your credit card balances.

It’s also important to check your credit report for errors. A mistake that makes lenders think you’re a risky borrower, such as bad debt you’ve never accrued, is something you’ll want to correct.

3. Can I afford to wait for rates to drop further?

Mortgage rates are more competitive today than they have been for much of the year. But in the coming months, borrowing rates on various loan products, including mortgages, are expected to fall as the Fed continues to lower its benchmark interest rate.

Last month, the Fed made its first rate cut in years, and it’s likely to be the first of many. If you can afford your current mortgage payments, you may want to wait until later in 2024 or early 2025 to refinance. This could result in an even lower interest rate on your new loan.

However, if you’re struggling to make your mortgage payments today and can lower your home loan interest rate by 1% or more based on current rates, refinancing right away may be your best option. You don’t want to risk falling behind on your mortgage payments and damaging your credit in the process. Also, in an extreme situation, falling behind on your mortgage payments could put you at risk of foreclosure.

It’s only natural to get excited about refinancing given where mortgage rates are today compared to around this time last year. But before you apply for a new home loan, ask these questions to make sure it’s a move that makes financial sense.