It is 2018 and interest rates are holding steady near record lows. Is it a good time to refinance your mortgage or should you wait for rates to drop? Well, interest rates for mortgage refinancing are a bit higher than a year ago, but they are still very low. Below is more information about whether you should wait or refinance your home now.
Home Refinance Market Perspective
We tend to think that home refinancing in 2018 is a good idea. If you are able to refinance your mortgage with a point lower rate, you can put 10% of your monthly mortgage payment back in your bank account every month. This means for every $1,000 you pay the lender, you could drop your payment by $100. This means you could save $12,000 over 10 years just by refinancing now.
Given that rates are in the 4% range still, even with a strong economy, you would expect most homeowners would refinance. But most homeowners are not budging. There are so many people not taking advantage of low rates that the US government has been rather puzzled. The Home Affordable Refinance Program or HARP is in its last year, and participation has really dropped.
But should you refinance? We understand that some people are worried about the costs of refinancing, especially after the mortgage crash of a decade ago. People also are afraid of the hassle of the underwriting process. It is true that underwriting got tougher after the crash, but it is faster and easier than a few years back. This is no reason to not try to refinance, especially if you have an FHA loan (see more details on FHA loans below).
Another common reason some people do not refinance is they are not able to get a rate that is 1% lower. This type of thinking is from decades ago when closing costs were a lot higher, and loans were much smaller. Back then, a typical loan was only $60,000 and the homeowner did have to lower their rate by 1% to save $1000 a year. But today, even a small reduction of .5% can result in saving more than $1000 a year in many cases. In fact, even a .25% decrease in rate can be beneficial.
Some people also do not refinance because they think they will have to wait many years before they recoup their closing costs. But today, closing costs are less than they used to be, and home prices are climbing nicely in many areas of the country. It can make sense to refinance in many more cases than people think. It is usually possible to recoup your closing costs in only a few years.
If you are thinking about refinancing in 2018, consider your major refinance options below.
Refinance with Conventional Loan
Property values as of 2018 have increased nicely in most of the US. This has increased the amount of equity many homeowners have. The more equity available, the easier time you will have refinancing. Borrowers who have credit above 700 or so and 20% in equity can usually refinance with a conventional loan this year. This is usually the least expensive of all the refinance options.
Should you pull the trigger on a conventional refinance? As of November 2017, the average interest rate on a conventional refinance was 4.29%. This is a very low interest rate when you consider the economy is doing well. But interest rates for conventional loans are still very low. Many experts think 30 year interest rates will increase in the near future, so we can make a strong argument to refinance soon. Even if rates were to drop a bit, we do not think it is worth the risk to wait.
Home Refinancing with a FHA Loan
You can do a refinance with FHA even if you do not have a lot of equity, a lower credit score and more debt than conventional lenders accept. FHA guarantees loans that private lenders issue to people with a less desirable credit profile. Even if you default, the lender will be reimbursed. You pay for this through monthly mortgage insurance.
With the US government backing your loan, mortgage companies may issue you a refinance loan with a very low rate; as of January 2018, the average rate for an FHA loan was just 4.26%. Borrowers who refinance these days with an FHA loan only have a credit score on the 640’s and 20% to 25% equity. The credit score for a FHA mortgage is very obtainable for most first time house buyers.
Should you opt for an FHA refinance? Again, we wonder if interest rates could possibly get much lower than they are today. FHA rates are actually a tick lower than conventional rates and are a really good deal for people with average credit, even with mortgage insurance payments. Talk to finance experts about 2018 FHA refinance guidelines.
Refinancing with a VA Mortgage
Probably the best option for refinancing in 2018, if it is available to you, is a VA loan. Designed for military veterans and current, active military, VA loans are backed by the Department of Veterans Affairs. You can have a low credit score and limited equity and still qualify for this refinance loan. In fact, in some cases, you can have zero equity and still get a new mortgage. You also do not have to pay for mortgage insurance.
Current records indicate recent borrowers only had 11% equity in their property, and even better, the average rate in November 2017 was just 4.01%! Now that is a sweet deal if you are eligible and qualify for a VA loan.
The bottom line is that we recommend refinancing soon because rates are probably lower than they should be. As the economy continues to take off, it is inevitable rates will rise. So, act fast!
References: Is Now the Right Time to Refinance? (2018). Retrieved from http://www.interest.com/refinance/news/is-now-the-right-time-to-refinance/