Thinking about refinancing? With mortgage rates hitting new lows, now's the time to act. The recent drop in rates has driven many to buy their first home, with existing home sales reaching a 14-year high. Millions are also exploring refinancing options, with activity at its highest since 2003, according to reports. In 2020, the average 30-year fixed mortgage rate fell from 3.86% to 2.96%, and if your rate is above 4%, you could secure a better deal. Act quickly, though.

Historically, recessions lead to lower mortgage rates, but those rates often rise as the economy rebounds. Nicole Kubin, a financial advocate, notes that the Mortgage Bankers Association expects increases once vaccinations become widespread, likely in late 2021. If you're considering refinancing, locking in these low rates with a fixed-rate mortgage is advisable.

Here's what you need to know about refinancing your mortgage this year to avoid missing out on savings:

What does refinancing your mortgage entail?

Refinancing means taking out a new mortgage to pay off your existing one. While the paperwork may seem daunting, it's often simpler than obtaining your first mortgage, and most importantly, it can save you money in the long run. According to Jeanniey Walden, a financial expert, there are three main types of refinances:

  • Rate and term: The simplest refinance, where you adjust your interest rate and the mortgage term.
  • Cash-out: This option allows you to pay off your existing mortgage while withdrawing cash from your home's equity for renovations or other expenses.
  • Financial life improvement: If your financial situation has improved, you might be able to eliminate mortgage insurance and secure a better rate.

Fees to anticipate when refinancing

Beware of claims that refinancing won't incur any costs. Homeowners should be aware of the following fees:

Origination fee

This charge is for the lender to create the loan and compensate those involved in the process.

Property taxes

Kubin states that property taxes are among the highest closing costs and vary by location and home value, averaging about $2,000. Generally, six months' worth of property tax is due at closing.

Application fee

Even if you already applied for your home loan, you'll need to pay an application fee for refinancing, typically between $75 and $300.

Mortgage refinancing fee

This can reach up to 1.5% of your mortgage amount, which can be significant. For example, a $200,000 mortgage could incur a $3,000 fee.

Appraisal and survey fee

If your home hasn't been appraised recently, you'll need to pay for one, averaging $175 to $350, alongside a survey fee to confirm property boundaries.

Inspection

An inspection, assessing your home's systems, can cost between $175 and $300.

Title search fee

This fee ensures the lender verifies ownership and checks for any outstanding debts on the property, averaging $700 to $900.

Attorney fee

Hiring an attorney to review your closing documents is wise. They may charge a flat fee or hourly rate, so clarify costs upfront.

Buydown points

If you plan to stay in your property long-term, consider buydown points, where you pay upfront to secure a lower interest rate. Jenna Holtz, a mortgage originator, suggests that your savings should offset these costs within five years.

Is refinancing worthwhile?

While these fees add up, refinancing can still be beneficial. Lauren Anastasio, a certified financial planner, recommends asking your lender for a break-even analysis. This will indicate how long you need to remain in your home to recover refinancing costs. For instance, if the break-even point is 72 months, it may not be worth it.

However, if you plan to stay long-term, here are the benefits:

Lower monthly payments and increased savings.

Refinancing can reduce your monthly mortgage by hundreds, freeing up cash for daily expenses, retirement, or fun. Holtz emphasizes that these savings can be redirected into savings, a college fund, home improvements, or paying off the mortgage faster.

Pay off your mortgage sooner.

A lower interest rate means more of your payment goes to the principal. Holtz explains that this leads to a quicker payoff.

Adjust your loan term.

While many want to pay off their mortgage quickly, some refinance to extend their loan term, which can lower payments and help save on interest. Others may shorten their term to align with retirement goals.

Switch from adjustable to fixed-rate mortgage.

Adjustable-rate mortgages were appealing due to lower initial rates, but with current lows, fixed-rate loans are now competitive. Locking in a low rate can safeguard against future increases.

Access your home's equity.

If your home's value has appreciated, you could consider a cash-out refinance to utilize that equity for paying off debt or funding renovations.