According to Freddie Mac, 30-year interest rates jumped by 40 basis points. That’s a significant jump of nearly half a percent.
If rates stay at these levels, many U.S. homeowners are likely to revisit the benefits of refinancing in an effort to beat further increases.
With today’s 15-year and 30-year rates still hovering at all time lows, it’s for good reason.
WHAT IS A REFINANCE?
When a homeowner refinances their mortgage, they are applying for a new loan to replace their existing one.
Homeowners can customize their refinance by choosing how their new rate will be structured, the loan term, and the amount borrowed.
Since you’re applying for a brand new mortgage loan, lenders will typically need to obtain the same information and documentation they needed when you bought your home.
With few exceptions to the rule, lenders will need to verify key information such as employment and income, credit scores and pay history, appraisal, etc.
BENEFITS OF REFINANCING
Homeowners refinance for a variety of reasons but most people choose to refinance their mortgage so that they can obtain a better interest rate and/or term.
Lowering an interest rate by just 1% can have a substantial effect on a homeowner’s monthly payment.
For example, say a homeowner purchased their home four years ago and financed $250,000 at a rate of 4.5%. Their current balance after four years would be approximately $232,721. By refinancing their current balance with a new rate of 3.5%, the homeowner would save over $200 per month.
Granted, the homeowner would be adding another four years back to the term of their loan. However, if money is tight right now, a savings of more than $200 per month could have a profound impact on the family budget.
Other reasons to refinance include:
- Convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
- Withdraw some of your home’s equity to consolidate debt, buy an automobile, do some home improvements, or use the cash for a down payment on an investment property
- Get out of paying mortgage insurance – not only are rates low, most areas have appreciated allowing many homeowners to rid themselves of PMI
- Convert from a 30-year loan down to a 20-year or 15-year, savings tens of thousands of dollars in interest
Generally, if you can lower your monthly payment and offset the costs of refinancing in a reasonable time frame, it may make sense to consider refinancing.
FACTORS TO CONSIDER BEFORE REFINANCING
Low mortgage rates are a great reason to consider refinancing. However, homeowners may want to factor in other considerations prior to refinancing.
What Is My Current Interest Rate?
Generally, if you can lower your mortgage rate and payment, it may be worth refinancing.
Getting a lower interest rate can mean lower payments. However, homeowners should also consider the costs of refinancing.
Just like when you bought your home, there will be certain costs associated when obtaining a mortgage loan. Unlike when you bought your home though, there won’t be an option for the seller to pay for the costs associated with obtaining a new mortgage loan.
How Much Will It Cost To Refinance?
Closing costs should always be taken into consideration when it comes to refinancing.
If you can save $100 per month but it costs you $5000 to do so, that means the recoup time would be 50 months. Unless you are going to be in your home for more than 50 months, it may not make sense to refinance.
Alternatively, if it costs you $3000 for closing fees but you’re saving $200 per month, you’d recoup the costs in just 15 months.
There are some refinance programs that offer “no cost refinancing”. For a slightly higher interest rate, homeowners can opt for reduced closing costs, thus reducing the time frame needed to recover the costs to refinance.
How Much Equity Do I Have In My Home?
With the exception of a few specialty loan programs, for most conventional loan refinance programs, lenders will typically want to see that you have at least a small amount of equity in order to refinance.
Generally, the more equity you have in your home, the easier it is to refinance. However, don’t let a lack of equity keep you from trying to refinance.
Even if you have little equity, or perhaps you’re even under water on your mortgage, you may still be able to take advantage of today’s historically low interest rates.
Loan programs such as the FHA Streamline refinance, the VA IRRL and the HARP program, allow homeowners will little or no equity to refinance.
Don’t let rising interest rates get away from you. There are still plenty of opportunities for U.S. homeowners to save money by refinancing.