4 types of borrowers that should refinance their mortgage loans now, experts say

While rates have been cooling, today’s high-rate environment has made it challenging for homeowners to refinance their mortgage loans. With average mortgage interest rates ranging from 6.08% to 7.79% in 2023 and 2024, many held onto their existing loans to avoid higher monthly payments.

But the outlook is getting brighter. “Current mortgage rates are higher than they were [during the pandemic], but they’re lower than they were at their recent peak,” observes Christy Bunce, president of New American Funding. “That presents a [chance] for several types of borrowers to save money.”

And, there are certain types of homeowners, in particular, who could benefit from refinancing their mortgages in today’s rate landscape.

Find out how affordable the right mortgage loan rate could be.

4 types of borrowers that should refinance their mortgage loans now, experts say

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Mortgage experts encourage exploring a refi soon if you fall into the below categories:

Those with adjustable-rate mortgages nearing adjustment

“A borrower who originated a 5/1 adjustable-rate mortgage (ARM) coming up for adjustment is a good candidate to consider a new fixed mortgage rate,” says Liz Bryant, region head for Northern California/Nevada at Citi. She notes this is especially valuable if your credit rating or debt position has improved over the past five years.

ARM rates in late 2019 averaged around 3.4%, but today’s adjustments could mean an increase of more than three percentage points. Refinancing to a fixed-rate mortgage now could help you avoid these potential rate jumps and secure more predictable monthly payments.

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Recent buyers who secured rates above 7%

“[Doing a refi] now could [lead to big savings] in interest and your monthly [payment] if you locked in a mortgage rate above 7% in the last couple of years,” says Debbie Calixto, sales manager at loanDepot. “We’re talking hundreds of dollars each month.”

Bunce and Bryant recommend looking for a rate at least 0.5% to 1% lower than your current rate. Such a reduction could significantly reduce monthly payments and interest fees over the life of the loan. Just make sure to review the closing costs carefully to ensure the savings outweigh the expense.

Homeowners looking to eliminate PMI

“If you’re currently paying private mortgage insurance (PMI), your increased home equity and the principal you’ve paid down could qualify you to eliminate it,” explains Calixto. 

Even if you end up with a higher interest rate after a refi, removing PMI could still save you money in the long run. This can be worthwhile if you’ve built substantial equity through rising home values or consistent mortgage payments.

Cash-out refinance candidates with high-interest debt

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“A cash-out refinance could be a game-changer if you’re carrying debt [with high interest including] credit cards or personal loans,” notes Calixto. This option lets you tap into your home equity to consolidate high-interest debts into one lower-interest mortgage payment.

While you might see your mortgage rate increase, rolling all these debts into one payment could lower your overall monthly expenses. 

“[This helps] you pay off debt faster and free up room in your budget,” she says.

Considerations to make before refinancing your mortgage

Mortgage experts recommend weighing these considerations before refinancing:

• Break-even point: Look at how long it’ll take to recover the closing costs through monthly savings. Most experts recommend proceeding only if you’ll break even within two to three years.
• Closing costs: Bunce mentions you can expect to pay 2% to 5% of your loan amount to close on a refi. Compare these upfront expenses to your potential monthly savings to ensure refinancing will pay off.
• Length of stay: If you might move soon, you may not have enough time to recover the refinancing costs. Bryant advises staying put for as long as it takes you to break even.
• Current loan progress: If you’re in the latter half of your mortgage term, Calixto points out refinancing might not be as advantageous. At this point, you’ve already paid most of the interest.
• Rate difference: Dean Rathbun, a mortgage loan officer at United American Mortgage Corporation, suggests looking for an opportunity to save 0.75% or greater on a no-points loan. “[This] helps keep the cost down, while making the savings recoup time two years or less,” he says.
• Future rate changes: Remember that you can usually refinance again after six months if rates drop significantly.

The bottom line

Before jumping into a mortgage refi, analyze your current loan and future financial goals. Each type of refinance serves a different purpose and has unique trade-offs. A mortgage professional can provide valuable insights about current rates and terms while walking you through various loan options.

And when you meet with one, ask for a cost and savings analysis. “A good loan officer will have the tools to monitor rates for you,” explains Rathbun. If refinancing doesn’t make sense right now, they can track rates and alert you when better opportunities arise.