The Federal Reserve recently announced that it would hike rates and ease bond purchases over the next several months, measures it has taken to prop up the economy during the pandemic. That could mean that the days of historically low mortgage rates – below 3% on the popular 30-year fixed-rate loan – are numbered.

There are already signs of rising interest rates. Mortgage buyer Freddie Mac reported Thursday that the average interest rate on a 30-year mortgage rose from 2.99% last week to 3.05%.

Does that mean you should refinance your mortgage by the end of the year?

First of all, let’s take a look at why rates fell so sharply this year, which fueled the refinancing craze.

Interest rates can go up and down for a number of reasons – including the returns on 10-year treasury bills, the stock market, and the job report. However, the main driver behind the low interest rates is the Federal Reserve, which has invested trillions of dollars in mortgage-backed security bonds to keep the housing market strong during the pandemic.

The 30-year fixed rate has changed significantly over the years. It peaked at 16.63% in 1981 when the Federal Reserve raised it to contain hyperinflation. 20 years ago it was 6.97% and 10 years ago it was 4.45%.

Like other homeowners, you have likely been inundated with promotions from lenders offering to save you hundreds of dollars a month by refinancing your mortgage at a lower interest rate. You may be wondering if you are a good candidate for a refinance, and if so, if it is the right time to do so.

When does refinancing make sense?

“If you can cut your mortgage rate by 0.5% to 0.75% and are likely to be staying in the house for more than three years, it makes sense to consider refinancing,” said Greg McBride, senior vice president and chief financial analyst for Bankrate.com.

There is a break-even phase that differs depending on the loan. You will usually start to take advantage of the refinancing after three years. Ask yourself, “Will you be staying or owning the house long enough to benefit from the refinance?” Said Joel Kan, associate vice president, Economic and Industry Forecasting, Mortgage Bankers Association.

Another important factor is the cost of refinancing. “There are a number of companies that have their hands in their pockets,” says McBride. There may be lender costs such as formation fees, application fees, and also third party fees such as evaluation fees, title work fees, local and state taxes, and recording fees. “See what’s on top besides the rate,” says McBride. In most cases, borrowers include these costs in the loan amount.

Other reasons to refinance: get cash out of your home or change your loan type for debt consolidation or home improvement projects. For example, if you have a variable rate mortgage, you may prefer to convert it to a fixed rate loan so that you don’t expect higher monthly payments as the rate moves higher after the initial fixed term.

When is it better to hold back on refinancing?

If your interest rate is close to 3%, refinancing may not necessarily be worth it, especially if you are unsure of how long to live or how long to keep your home.

“The rate may not have fallen enough,” says Kan. “Refinance when there are enough benefits to refinance. Do you take cash What’s the lowest possible rate? If you are moving and want to sell your home in the near future – a year or so – you may not want to refinance. Take into account the closing costs and the duration of the loan as well as the interest rate. “

There are many online calculators that you can use to determine your potential savings by entering the new loan amount, interest rate and loan duration, such as: an offer from Fannie Mae. “If it’s a larger loan amount, even if you get an interest rate cut,” it may not be worth it, Kan says. “Your savings depend on the loan size and the interest rate cut. Smaller loans need a bigger rate cut to make savings. “

According to Jonathan Lee, senior director at Zillow Home Loans, the average home loan size is $ 300,000 to $ 400,000.

Other reasons to refinance include: When your financial situation has changed or worsened, says McBride. Another reason is if you fail to save on total interest or on your monthly payment during the life of the loan.

What are the biggest barriers to refinancing?

Loss of income due to a lack of work, decreased or poor creditworthiness and a high debt-income ratio can prevent refinancing.

Debt to Income Ratio is your total debt each month compared to your monthly income. An optimal debt to income ratio is less than 36%, says McBride. That means your debt – including your monthly mortgage payment, monthly maintenance fees or general dues, taxes, property insurance, credit cards, and vehicle loans – shouldn’t exceed 36% of your gross wages.

Certain business owners may have difficulty obtaining refinancing. It can be more difficult to qualify for a mortgage if, for example, you have 1099 tax receipts from a sole proprietorship rather than W-2 income as an employee.

But “without traditional sources of income, you can have good credit,” says Kan. There are loan models that reflect non-traditional income.

What else should I consider?

Closing costs: There are costs associated with refinancing a loan that are typically lower than buying a home. If you are buying a home, the lender estimates that the closing cost can range from 2% to 6% of the loan amount.

When refinanced, the average closing cost was less than 1% (0.87%) of the loan amount, excluding taxes, according to a report from ClosingCorp, a San Diego company that provides residential property closing cost data for mortgages and real estate service industries. Including taxes, the average refinancing costs were 1.29% of the loan amount.

The estimates for the closing costs vary depending on the state and municipality of the house. However, since the cost of getting a loan can include state and local taxes, ask what is included in the term “closing costs”.

According to ClosingCorp, the average cost to close a single family home in 2020 was $ 3,398 including tax and $ 2,287 excluding tax. ClosingCorp’s refinancing calculations include a lender’s title policy, valuation, settlement and recording fees, and various state and local taxes.

Some states require an attorney to review graduation documents. If required in your state, it would add an attorney’s fee to your closing costs.

Lender: In short, lender loans can eliminate all or part of your closing costs. Sometimes a lender will offer lender credit for the cost of closing your loan, or you can ask for it. Lender loans can increase your mortgage interest rate from 2.75% by a fraction such as 2.875% or more, but they don’t always increase your interest rate.

One downside to getting lender loans would be if the lender loans increase your mortgage rate and cause you to pay more interest over the life of your loan than a lower mortgage rate and some closing costs that go into the loan amount.

The ability to get loans from the lender depends on your mortgage lending value you.

Points: One point is equal to 1% of the loan amount, and lenders can offer you a lower mortgage rate, but with a fraction of one or more points attached. When comparing prices, make sure that you are comparing the actual prices and all the points associated with each price that different lenders are offering.