Refinancing 101: Does it Make Sense to Refinance in 2021?

When should you refinance your mortgage? With home mortgage interest rates hitting historic lows, if you're a homeowner, you may have been wondering if it's the best time to refinance, or if you should wait a little longer to see if interest rates continue to fall.

After all, a few percentage points can make a big difference. For example, if you have a mortgage that was originally $500,000 at 6 percent, you've got a $2,998 monthly payment. If you could refinance that same amount of money at 3 percent rate, you'd have a monthly payment of $2,108. That's an extra $10,680 in your pocket every year.

Of course, like so many other financial decisions in life, deciding when it makes sense to refinance depends on your personal situation. But, given how low interest rates have gone recently, there's no doubt that many homeowners can save money by refinancing a home loan now. In fact, in November, interest rates on a 30-year, fixed-rate mortgage dropped to the lowest level since the U.S. government began tracking mortgage rates in 1971.

But what does 2021 hold for the home mortgage market? It's impossible to predict the future with 100 percent accuracy, but here's what the forecast looks like for now.

The Outlook on Interest Rates in 2021 and Beyond

What can you expect from the market in 2021? Well, if you've been postponing a refinance, watching for interest rates to drop even further, you may not get much more benefit from waiting further.

That's because industry experts expect mortgage rates to begin to rise in 2021, slowly but steadily, continuing at least through 2023. The latest outlook from the Mortgage Bankers Association predicts rates will climb to 3.3 percent in 2021.

There are a couple of factors driving this prediction. First, experts are expecting a strengthening of the economy this year, along with job growth, which often prompts the Federal Reserve to start raising interest rates. However, this increase is likely to be steadied by the fact that mortgage lenders are going to want to stay competitive in the market, and not bump their rates by too much.

In short, the short-term outlook for interest rates is good, especially when you compare it to the historical 8 percent average rate. But don't bet on rates continuing to drop; they've likely gone about as low as they're going to, before starting to climb again. If you're in the market for a refinance, now is the time to act.

Do Your 2021 Plans Include a Move?

The current interest rate is a big factor in deciding when it makes sense to refinance your home. But it's not the only consideration. Another question you should ask yourself is: Am I planning to sell my house because I'm moving or relocating this year, or in the near future?

Here's why. Refinancing a mortgage can shrink your monthly payment, and even reduce the overall amount of interest you need to pay, but the process does cost money. It will likely take some time to offset that cost with savings from lower monthly payments—from a few months to a few years.

If you're moving anytime soon, fees might eat up any savings and it won't make sense to refinance your mortgage.

It's a good idea to pencil out the expected cost of a refinance and figure out when your break even point will be, then compare that to your life plans for the rest of 2021, and beyond.

Do You Have Big Goals this Year?

Sometimes it's not the market that dictates the best time for a refinance. Sometimes it's your personal life situation. The Islands are an expensive place to live, and many people don't realize they may have a lot of value built up in their home that could be leveraged. If you're expecting a large expense in 2021 and are short on cash, refinancing your home to tap its equity and take out cash can make smart financial sense.

What does the rest of the year hold for you and your family? Medical care for a loved one? Educational expenses for a child? Starting a business? Using some of the cash that you'd otherwise put toward lower monthly payments can make far more sense than taking out a personal loan with double-digit interest rates.

Refinancing can also be a good idea if you're trying to get out of debt this year. If you're carrying a high balance on credit cards, student loans, or car payments, debt consolidation with a cash out refinance could really give you a head start on paying it off. The current average credit card interest rate if you have good credit is about 17 percent. Paying off a $10,000 loan at 17 percent over 30 years will cost $143 every month; at 3 percent, it's $42.

That's not an insignificant savings; the average credit card balance for a Hawaii resident topped $5,600 in 2020, according to the Experian credit scoring agency. One caution: Don't use home equity for debt consolidation if there's a possibility that you'll just run up another big credit card balance.

The right time to refinance isn't a simple question, and the answer will depend on your personal circumstances. But, with mortgage rates as low as they are, it's a good time to explore whether a refinance makes sense for you in 2021. If you want to talk with an expert to learn more, reach out and we'll get in touch with you!

Also, check out our blog post, "Should I Refinance?" to learn more about calculating your break-even point, meaning how long it will take for the savings of a refinance to pay for its up-front cost.