With mortgage rates at an all-time low, refinancing seems like a no brainer - right? It certainly is for a lot of homeowners. In fact, according to a recent survey, almost one third of U.S. homeowners are thinking about refinancing in the next year.

Before you make such an important decision however, there are a number of factors you need to consider. In addition to rates, they include your financial goals, how long you plan to live in your current home, and the state of your credit.

When does refinancing make sense?

Low rates aren’t the only reason homeowners opt for a mortgage refinance. Others include:

• Having enough equity in your home to eliminate mortgage insurance
  

• Reducing the terms of the loan so you can pay it off quicker
  

• Tapping into your equity with a cash-out refinance
  

What’s considered a good rate?

Just because the Federal Reserve reduces interest rates doesn’t mean mortgage rates will necessarily follow. It’s also true that the rates you see advertised may not be the rate you get when you try to refinance. Rates change all the time.

The rate a lender will offer you depends as much on your credit score and how much equity you have in your home as on what the current mortgage rate is. Lenders will also look at the history and stability of your income. The better you look to the lender the more competitive the rate you’ll be offered.

Should I refinance to get a half percent reduction in my mortgage?

The basic rule is to consider refinancing when the rates are one percent or more below your current rate. Like all generalizations however, it may not apply to your situation.

One of the easiest ways to find out if a mortgage refinance makes financial sense is to use a refinancing calculator. You’ll have to add all the expenses related to refinancing: the appraisal, credit check, origination and closing fees, and what interest rate you qualify for.

You’ll also need to determine if you have at least 20% equity in your home. You can find out by researching what comparable homes in your area are selling for to figure out how much your house is worth. Subtract what you still owe from that number to find out how much equity you have.

Knowing how much equity you have in your home is important because having less than 20% requires you to carry mortgage insurance - which isn’t cheap. Don’t forget to add it if necessary when you calculate your refinance.

Will I really save enough to make refinancing worth it?

Closing costs are going to be anywhere from two to five percent, so you have to figure out how long it will take you to recoup that cost. For instance: if your closing cost is $2,400, and you are saving $100 a month on your refinance, it will take two years to pay off the cost. If you move before the two years are up, you’ll lose money on the refinance.

That’s one reason it’s so important to consider your future plans. If you’re starting a family and will need a bigger house in the near future, or about to become empty nesters and plan to downsize, refinancing probably isn’t the path for you to take.

If you already have a lot of equity in your home, refinancing may not be the way to go. Homeowners thinking about refinancing and getting a new 30 - 20 year loan need to consider the extra interest they’ll be facing even if their new rates are substantially lower.

It’s usually a better idea to refinance for the same number of years you have remaining on your current loan. That way you might lower your payments without adding the interest you’d incur by increasing the terms of the loan.

What are closing costs? They can include, but are not limited to:

• Appraisal and inspection - The lender wants to know your home is valued correctly. For that reason, they usually require an appraisal that will cost anywhere from $300 to $500. They may also require a termite inspection and an overall property inspection as well. If you have a recent appraisal, the requirement could be waived. If you’ve been living in your home for a number of years, and you believe it has increased in value, a new appraisal will be in your best interest.
  

• Mortgage insurance fees - If you put less than 20% down on a conventional mortgage, you are required to pay mortgage insurance. This helps protect the lender in the even you default on your loan. If you have an FHA or VA loan, the government requires you to carry insurance. When you refinance, the lender will pull courthouse records to verify you still own your home and whether or not there are any liens against it. Title insurance again protects the lender from errors and omissions made during the title search. Some lenders will require a survey of your property if one has not recently been completed.
  

• Origination fees - These are costs associated with processing your loan. They might be called underwriting fees, administrative fees, application fees, or document preparation fees. They are open for negotiation, so don’t be afraid to discuss these costs with your lender.
  

• Discount points - Points are interest you pay. They’re based on your total mortgage amount. Paying the points early will lower your long term interest rate. These are discount points and may be worth it if you plan to stay in your home for the foreseeable future.
  

• Penalty fees for early repayment - These aren’t common, but they do exist usually in the first three to five years of the refinance. They are not allowed with FHA and VA mortgages and are actually illegal in some states.
  

Should I change the type of loan I have?

This will depend on how long you intend to live in your home and what the terms of your current mortgage are. For instance: You have an adjustable rate mortgage (ARM) set at three percent for the first five years. You plan to continue living in your home for the foreseeable future, and your ARM is nearing the time it can increase. Refinancing to a fixed rate mortgage will insure that your interest rate remains the same for the duration of the new loan.

In another instance: You know you’ll be moving in the next few years, and you have a fixed rate mortgage. Refinancing to an ARM might be beneficial because lenders often offer lower initial rates on this type of loan.

Have things changed since you closed on your house?

If your credit score has improved since you closed on your home, you might be able to refinance and get a lower interest rate that will reduce your monthly payments. Conversely, if you’ve suffered some financial setbacks or taken on new debt, your credit score may not look attractive to lenders making it harder for you to refinance at a lower rate. If this is the case, your best bet is to repair your credit before you visit a lender to discuss refinancing.

Fannie Mae and Freddie Mac have loan refinancing options for homeowners who don’t qualify for conventional loan refinancing. These programs are for homeowners who can’t qualify for conventional refinancing because they owe more than 97% of their home’s fair market value.

How has Covid-19 affected mortgages?

The demand for loans is high, and staffing in some areas is still low, which slows the process. You may find that lenders have raised their fees, changed credit score requirements, and suspended some products altogether. If you’re having trouble making your mortgage payments, the Consumer Financial Protection Bureau website is a good place to go to start looking for help.

Note: As of December 1, 2020, some lenders have started charging an “adverse market refinance fee” on refinance transactions. This fee is charged by Fannie Mae and Freddie Mac to cover economic and market uncertainty due to Covid-19. It will cost you 0.5% on conventional loans and amounts to a sales tax.

These are only charged on conventional loans. If you’re refinancing a government backed home loan, you won’t pay the fee. If you’re refinancing an amount under $125,000, you won’t pay the fee. Jumbo loans are exempt from the fee.