In 2018, mortgage refinance rates are not nearly as low as they were a few years ago. According to a Zillow report in June 2018, the average mortgage refinance rate for a 30 year, fixed mortgage was 4.75%. With the US economy getting stronger and unemployment low, interest rates have been slowly on the rise. It is expected interest rates could hit 5% sometime in the next year. In 2023 mortgage rates spiked to nearly 7%, but most economists believe we will see lower interest rates for refinancing and home buying in 2024.
Is it worth refinancing? While refinance business is clearly down as rates have gone up, if you can get a rate that is at least .5% lower than where you stand today, it might be worth doing the refinance. But as you are considering a refinance, there are some red flags to beware of:
#1 Not Doing Enough Shopping
A major mistake and red flag is to fail to shop around for your mortgage. Many people just grab the first mortgage they see that is lower than what they have now. They also may just go to their bank or current mortgage provider. While everyone wants convenience, sometimes convenience comes with a price.
It will always pay you in the long term to shop around for your refinance mortgage. An 1/8 point difference in rate might not sound like a lot, but this is $20 or $30 less per month, and that will save you thousands in interest over the years. You also can find different lenders offering different rates for the same program. The reason for this is different mortgage lenders have different types of investors looking for different rates of return. So it is smart to get at least three mortgage rate quotes.
#2 Looking Only at the Rate
Everyone wants to score a low mortgage rate, but that is not the only factor. The low rate you see advertised may not turn out to be the rate you get. The low rate could be only for the people with the highest credit scores. You may realize that after you start the refinance process, you are getting a higher rate, but you do not want to go to another lender after all the time and effort you expended.
Also remember that closing costs come in different shapes and sizes. The rate you see may make different assumptions about discount points and closing costs.
#3 Rate Isn’t Low Enough
People want to refinance to get a lower rate, but if the rate is not low enough, refinancing may not be worth it. It might sound nice to save $50 per month, but closing costs run into the thousands of dollars on most loans. It might take many years to make up your closing costs and by that time, you may have moved anyway.
#4 Refinancing Too Often
Everyone wants to save a buck on those monthly payments, but keep in mind that every time you do a new mortgage, you are paying closing costs. You could pay 5% of the amount of the loan in closing costs, so it is usually not a good idea to be refinancing every few years.
#5 Stretching the Loan Out
When you see a rate that is lower than what you pay, it is tempting to refinance for sure. As we said before, we all want to save money. But many do not realize that every time you refinance, you are starting your loan over again. People tend to think more about the short-term money saving option and not the long term. How many people want to pay on a mortgage when they are 80 years old? That is what can happen if you refinance too much.
Many financial experts recommend refinancing your loan into a shorter period, such as 15 or 20 years. Yes, you will have a higher payment, but the interest will be much less because you are paying fewer years.
#6 Trying to Time Refinance Rates
When rates are in motion, many buyers and refinancers try to time the rates. But even mortgage experts have difficulty timing the rates from day to day and week to week. Your decision to refinance should not depend upon the rate going down a certain amount in a few days. If it looks like you can save .5% on your rate if you refinance in the next few weeks, go ahead and lock it and get it done. People like to know when is the best time to get a refinance mortgage. It is very difficult to time the market.
May contribute to an escalation in the overall expense of your loan. Prolonging the repayment term, even with a reduced interest rate or smaller monthly installment, has the potential to amplify your total interest outlay.
While refinancing to attain a lower interest rate and monthly payment is plausible, it is essential to acknowledge that the cumulative interest cost might surpass the savings. To break even and start realizing savings, your new loan’s Annual Percentage Rate (APR) should be at least 0.70% lower than your original rate. People also like to refinance a mortgage with no closing costs.
Moreover, unless the loan is paid off prematurely or the property is sold, opting for mortgage refinancing extends the duration of your indebtedness. This prolonged debt commitment could pose challenges in achieving other financial objectives.
Qualification for refinancing necessitates meeting various criteria during the underwriting process, aside from covering closing costs. Lenders typically mandate specific conditions, including:
Credit Score: Traditional lenders often demand a minimum credit score of 620, while the most favorable refinance rates are typically reserved for those with an excellent credit score of at least 740. Find out what credit score is needed to refinance a mortgage today.
Steady Employment: Demonstrating at least two years of consistent employment, accompanied by income statements, is a standard requirement. Additionally, proof of ample cash reserves may be necessary.
Home Equity: Many home equity lenders stipulate a minimum of 20% equity in your home as a prerequisite for mortgage refinancing.
Home Appraisal: An assessment of your property’s value relative to the requested loan amount is crucial. Refinancing may be postponed if your mortgage is underwater, indicating that you owe more than the current value of the home.