Mortgage rates have been falling but should you refinance?

While you’ve been preoccupied with a plague and politics, mortgage rates have been falling and refinances have been booming.

Almost 18 million homeowners could cut their mortgage's interest rate by 0.75% or more, according to Black Knight, a mortgage analytics company. That transcends the 3 million homeowners who refinanced in the first half of 2020.

Mortgage rates dipped to record low territory this summer and fall. The average interest rate on the 30-year fixed-rate mortgage has been under 3% since early September, according to NerdWallet's daily rate survey.

Not sure if now is the time to refinance? Quiet your confusion by asking yourself the following questions.

1. What's my goal and is it within reach?

Identifying your goal is the first step because it points you toward the right refinance loan. Here are three common goals:

• To reduce the monthly payment. For this simple refinance, apply for a loan of the same term.
• To pay less interest. When you refinance a 30-year mortgage into a loan with shorter term, your monthly payments are likely to be higher, but you'll pay less interest over the life of the loan.
• To get cash. A cash-out refinance allows you to borrow more than you currently owe and take the difference in cash.

Once you've identified your goal, you need to figure out if it's realistic.

If the goal is a smaller monthly payment

You'll lose money if you sell the home before reaching the break-even point.

When you refinance, you pay hundreds (or thousands) of dollars in closing costs. You want to keep the loan long enough for the savings to exceed those costs. That often takes a few years.

If the goal is to pay less interest

If you shorten the loan term, you'll probably end up with a higher monthly payment. What happens if you have a financial emergency? Will you still be able to make the monthly payment?

It might be better to refinance for the same term as the current mortgage instead of a shorter one and pay extra principal each month. You'll still pay it off more quickly, but you can stop making the extra payments when money is tight.

If the goal is to get cash

In most cases, you'll be able to borrow up to 80% of your home's value. This means that if you currently owe 70% of the home's value, you'll be able to cash out 10% of it.

Determine your home's current value and multiply it by 0.8. That's roughly the amount you'll be able to borrow.

3. How will the new refinancing fee affect me?

The refinancing door remains open despite an "adverse market refinance fee" imposed by Fannie Mae and Freddie Mac that effectively raises interest rates on refinances by about one-eighth of a percentage point.

The adverse market refinance fee applies only to conventional mortgages. If you're refinancing into a jumbo loan, or a mortgage backed by the FHA, VA or USDA, the fee won't be imposed.

The fee does apply to mortgages securitized by Fannie Mae and Freddie Mac. . There are a few exceptions: The fee won't be imposed on refinances of $125,000 or less, construction-to-permanent loans, or HomeReady and Home Possible mortgages.

The fee is paid to Fannie and Freddie by the lender, and is unlikely to appear on your Loan Estimate paperwork. Instead, it will probably be included in your interest rate. A 0.5% fee translates into an interest rate increase of about one-eighth of a percentage point.

If you're refinancing to reduce your monthly payment, the fee matters because the higher interest rate will push the break-even point back a few months.

When you refinance for a shorter term, the savings on interest quickly overshadows the slightly higher rate.

And if you're going for a cash-out refi, the goal is to get cash and not to save money, so the fee is irrelevant to your decision.