Are you wondering whether or not now is a good time to refinance your home mortgage? The short answer is to contact a home mortgage professional for an answer tailored to your special circumstances. For example, the loan officers at Citywide Home Loans use software that, with some basic information from you, can calculate in just 15-20 minutes a cost analysis on the current interest rate and fees and how long you will have to stay in your home to make a refinance worthwhile financially. They can look up your current loan, the amortization schedule and payoff time, compare it with a new loan and tell you how much you can lower your monthly payment. Make sure that whoever you go to will conduct an analysis free of charge and with no obligation to refinance with them.
However, if you’d like to know more about your options before you call, this article might contain just the information you’re looking for.
Mortgage interest rates have plummeted to historic lows, the #1 reason that is making homeowners think about refinancing. You might be hoping that a refinance can help you:
- lower your monthly payments,
- shorten the term of your loan and pay it off faster, with less money going toward interest,
- pull out cash for another purchase or a financial emergency,
- consolidate debt, or
- convert from an adjustable-rate mortgage (ARM)to a fixed-rate mortgage, or vice versa.
How can I time refinancing so I get the lowest interest rate possible?
In the wake of the Coronavirus, rates are still fluctuating, but they are likely to even out and stay low through the rest of the year, once lenders catch up with the backlog from the initial wave of refi requests. Another consideration is, “Will lenders have the resources to let mortgage rates go any lower?” Banks could artificially hold rates up to “slow the flow” of refinances, in order to ensure the money is there to fund the demand. You don’t have to rush to refinance or get a mortgage, because at the time this article was written, banks were likely to be inundated with applications. A little later this year could be the opportune time to apply for or refinance a loan.
The best approach could be to determine a target rate that justifies your cost of refinancing, and then work with a professional who understands the factors that impact mortgage rates daily, and who will monitor that target rate for you and advise you when to lock it in. Generally, if refinancing will save you money, help you build equity and pay off your mortgage faster, it’s a good decision. And with rates this low, even people who have relatively new mortgages may be able to benefit from refinancing.
What are the benefits of refinancing to shorten the loan’s term?
When interest rates are low, you might be able to refinance your existing loan for another loan with a significantly shorter term, but without much change in the monthly payment. That could save a lot of money in interest payments. Do the math, or let a professional help you, and see what works.
Should I refinance to take equity out of my home?
Homeowners often access the equity in their homes to help pay for a large purchase or to cover major expenses, such as the costs of home remodeling or a child’s education. They justify the refinancing because remodeling may add value to the home or because the interest rate on the mortgage loan is less than the rate on money borrowed from another source.
Another reason to access equity can be a serious financial emergency, such as losing your job. At face value, replacing high-interest credit card debt with a low-interest mortgage may seem like a good idea. But you should carefully research all your options for raising funds before you take this step. If you do a cash-out refinance, you may be charged a higher interest rate on the new mortgage than for a rate-and-term refinance. A savvy homeowner is always looking for ways to reduce debt, build equity, save money, and eliminate their mortgage payment. Taking cash out of your equity when you refinance does not help to achieve any of those goals. This is another good time to consult with a professional.
When is it financially sound to convert from an ARM to a fixed-rate mortgage, or vice versa?
ARMs (Adjustable Rate Mortgages) often offer lower rates than fixed-rate mortgages. However, periodic rate adjustments can result in increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate and can eliminate concern over future interest rate hikes.
Converting from a fixed-rate loan to an ARM can be a sound financial strategy, if interest rates are falling and you don’t plan to stay in your home for more than a few years. Currently, rates may be at or near their lowest rates and the chances of them going up are greater than getting lower. When mortgage interest rates have a better chance of rising, this is not a wise strategy.
How long does it take to recoup the costs of refinancing?
The interest rate is not the only cost to weigh when you’re considering whether refinancing is worth it. Expect closing costs to total 2 to 5 percent of the principal amount of the loan. As with an original mortgage, refinancing requires an appraisal, title search, and application fees. Many lenders let you roll the closing costs into your principal balance and finance them as part of the loan. To determine an approximate break-even point, divide the total closing costs by the amount you will save each month.
When refinancing a mortgage, you’ll also have “pre-paids” or “escrows,” which are the money you are required put aside upfront to account for future property tax and homeowner’s insurance liabilities. Once your old loan is paid off, your existing lender will send you a refund of the balance in your old escrow account approximately 30 days after closing. You will also skip a mortgage payment in the month immediately following your settlement. It is advisable that you bring the money required to establish the escrow account on your new loan to settlement, if you can afford it.
When is private mortgage insurance (PMI) required? Can I avoid it?
Private mortgage insurance is generally required when less than a 20 percent down payment is made on a home purchase, or in the case of a refinance, when the homeowner has less than 20 percent equity in the home. On conventional loans, the monthly PMI drops off automatically when the loan balance equals 78 percent of the original value of the home at the time the mortgage was originated.
How long does it take to complete the mortgage refinance process?
The time it takes to refinance depends on your lender, as well as how long it takes to complete inspections, appraisals, credit checks and other requirements. Even though the internet has simplified the process, you should probably count on it taking at least 30 days.
The Bottom Line
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. When used carefully, it can also be a valuable tool for bringing debt under control. Before you refinance, take a careful look at your financial situation, consider all of the information above and seek advice from a mortgage loan professional.