People who own their home frequently are watching mortgage rates to determine if now is a good time to refinance their home loan. Whenever you refinance, you always are taking a bit of a gamble because it is hard to say what rates will be tomorrow, let alone next month or next year. When considering taking the time to refinance your house, ask yourself this question: Will this lower my mortgage payments and save me money in the long run as well?
In 2018, many Americans are holding off on refinancing because rates are on the rise. But for some people, it might be smart to go ahead and refinance; if the economy continues to do well, it is entirely possible we could see 5% rates next year. This could make it hard to refinance for most Americans who bought their home in the last several years. But sooner or later, you will probably want to pull the trigger and refinance because of some of the reasons below:
#1 Your Home Has Plenty of Equity
Most lenders want you to have at least 20% equity before you do a refinance without mortgage insurance. For people who have more than 20% equity, it may make sense to refinance and pull out cash even if you cannot save much on the interest rate.
As of mid-2018, we are seeing rising rates and appreciating home values. Throughout the US, home values appreciated by more than 6% over last year. Some areas of the country have seen 10% or 20% appreciation. Thus, you could have more equity in your property than you realize. If you want to pull out cash with a refinance, you could be in luck this year with the higher prices. But if you do not want to use your equity, you should be instead watching home refinance rates.
#2 Refinance Rates Are Still Pretty Darn Low
Interest rates are certainly not the lowest they have ever been. Right now, refinance rates are well above 4% and could be nearing 5% for some borrowers. Still, remember that rates are still very low when looking over the past decades. Even as recently as 2006, rates were in the 6-7% range.
What really matters of course is what your rate is right now. If your rate is at least ½ a percent higher than current rates, you could make the argument to refinance. This is especially true if you are going to stay in your home for at least four or five years. If you plan to stay put, you will probably save more money by refinancing than what you would pay in closing costs. If you think you are going to move in two or three years, you may want to avoid refinancing because your closing costs will be more than what you will save in interest.
#3 Your Credit Score Is High
Having a credit score in the 700’s means you can get the best refinance rates. Right now, according to BankRate, a fixed rate 30 year refinance loan in May 2018 is still well below 5% for well qualified borrowers. Even if your credit score is only in the mid to high 600’s, you still could do well to refinance if you can save ½ a point on your mortgage. It also is good to refinance if you have paid down credit cards because your credit score will have risen substantially.
#5 Retiring Soon
Some people want to refinance their mortgage when they are getting close to retirement. If they have the chance to lower their payment by $100 per month, it can make sense to refinance and pay the closing costs. Another option is to refinance into a 15-year mortgage if you are going to be retiring in several years and want to pay off the house sooner.
#6 You Have an Adjustable Rate Mortgage
A common reason to refinance into a fixed rate mortgage is if you have an ARM that is going to reset. Rates are on the rise, and we could well see rates at 5% in the next year. Refinancing an adjustable rate mortgage is often wise before the term converts to the variable rate period. Now could be a good time to refinance that ARM before rates get a lot higher.
#7 You Have an FHA Mortgage
One of the benefits of an FHA loan is if you just want to refinance into a lower rate. You can do an FHA streamline refinance that does not require a credit check, income check or new appraisal. This type of refinance can close fast and you can save a good deal on your monthly payment. FHA refinance rates remain competitive this year.
FHA now requires that borrower pay mortgage insurance monthly for life. So if you took out a FHA mortgage recently, you are likely scheduled to pay mortgage insurance every month if you keep the FHA loan. It might be wise to refinance out of the FHA loan and get a mortgage that has no monthly mortgage insurance required. This could save you a lot of money over the life of the loan.
The Bottom Line on Timing the Market with a Refinance Mortgage
Whether it is a good time or not to refinance depends upon your interest rate and exact financial and personal situation. For some Americans, right now could be a smart time to refinance before rates rise much more. The strength of the US economy seems well established and it is likely rates are more likely to rise in the next year or two rather than fall. It could be an especially good time to refinance if you are in an ARM because rates are very likely just going to rise in the next year.