People who own a home and have a mortgage are often watching current mortgage interest rates. They want to figure out if now is the best time to refinance their mortgage.
This is always a gamble because one can never say for certain what mortgage rates will be, other than today at this exact moment. Depending upon many factors, mortgage interest rates could skew higher or lower in the next few weeks, months or year.
But sooner or later, you will need to make the call to refinance a mortgage to save money on your payment and/or to get cash out. Here are some signs that suggest it could be time to refinance your mortgage.
Timing a mortgage refinance can be tricky, but watching the market and being prepared to move forward is worth the effort.
Consider each point carefully; not every situation calls for a refinance. It is important to be certain that there is a financial benefit to do so.
#1 You Have a Lot of Equity
Homeowners need to have 20% or more equity in their home in most cases to do a refinance without having to pay for mortgage insurance.
If you have more than 20% equity, it could be a smart move to refinance and pull out some of your cash. As of mid-2017, home prices have been rising significantly in many parts of the country. It is hard to say when home prices will max out and start to fall. In high cost areas such as some parts of California, there are signs that home prices may start to fall.
If the price of your home is getting close to its maximum in this real estate cycle, it could be time to pull the trigger. If prices start to fall, your amount of equity will drop. You will not have as much money available to do with what you wish, such as renovate the home.
Home owners mulling whether or not it’s time to refinance should talk to their broker and their real estate agent to determine if home prices are nearing their peak for the current cycle.
However, if pulling out cash is not your goal, the value of the home does not matter. Interest rates are what you should worry about.
#2 Interest Rates Are Still Low
Are interest rates the lowest they have ever been? Probably not. Rates for mortgage refinancing have climbed some in 2017, but generally, mortgages are still available in the low 4s and even lower in some cases.
Just as important as what the interest rate is today is what it was when you got your mortgage. If you got a mortgage a decade ago, you may have a rate above 5%. If that is true, you could save a substantial amount each month, as well as interest over the life of the loan, by doing a refinance.
Also keep in mind that mortgage refinance interest rates could rise more in the future. There is no way we can say for sure what will happen, but we do know that the Fed has raised its rate three times in the last year, and it promises more increases. So, you could be seeing one of the last best times to do your refinance in this economic cycle.
#3 You Have Good Credit
If you have been responsible with your debts, including paying your mortgage, car payments and credit cards on time, you probably have a good credit score.
People who have a credit score above 680 have the best chances for getting a good, low interest rate today.
Also, it is a good time to refinance if you have recently paid off credit cards. With a low credit utilization rate, your score will be higher than it was in the past when you had more debt.
#4 You Are Close to Retirement
Some people choose to refinance when they are nearing retirement. The reasons for doing so depend upon your financial goals and situation.
Some may simply want to have a lower payment as their income may begin to decline. Having a payment that is $100 or more less per month can make a real difference.
But others may have far different goals. Some people within several years of retirement may opt to move into a 15-year mortgage. This will give you a higher payment, often by hundreds of dollars, but on the plus side, you will pay off your loan hopefully by the time you stop working.
Many people dream of entering retirement with a mortgage paid off.
#5 You Plan to Stay in the House
Expect to pay at least 3% and up to 6% of the amount borrowed in closing costs on a refinance. So, on a $200,000 refinance, you might pay from $6,000 to $12,000 in closing costs. This does not make sense for many people if they plan to sell the home in a year or two.
But if you think you will stay in the home for three or five years or longer, refinancing may be the smart move. It comes down to how much your monthly payment will drop.
#6 You Have an ARM
If your adjustable rate mortgage is going to reset to a higher rate, you may want to look at getting a fixed rate loan while rates are still low. This is probably the case if you have a subprime ARM.
But some conventional ARMs still may be a good deal in the current rate environment.
#7 You Have an FHA Mortgage and Want a Streamline Refinance
If you have a home loan that is insured by the FHA and just want to refinance into a lower rate, you can take advantage of the FHA streamline refinance program. You do not need to have your credit or income checked. Nor do you need a new appraisal. Rates are low, so you might save big!
The Bottom Line
Low interest rates mean that this is still a good time for many people to refinance their mortgage. Review the above signs and talk to your mortgage broker today to see if refinancing is right for you.
6 Questions to Ask Before a Refinance. (n.d.). Retrieved from http://www.bankrate.com/finance/refinance/6-questions-to-ask-before-a-refinance-8.aspx