One of the hardest things to gauge as a homeowner is when is the ideal time to refinance your home mortgage. If anyone could precisely predict when mortgage rates will rise and fall, they could probably retire very wealthy. But even seasoned real estate and stock experts cannot predict the variability of mortgage rates.
It’s important, however, for homeowners to have as much information as possible to decide when to refinance. Refinancing a home requires you to spend money on an appraisal, title search, application costs, and closing costs.
Below is more information to know about refinancing your mortgage.
Refinance To Get a Lower Rate
Without a doubt, most homeowners want to refinance if they can score a lower rate. Over time, some lenders say it’s worthwhile to refinance if you can save 1% or more on your rate. But in recent times, some argue that refinancing may be worth it if you can save.75%.
Cutting your interest rate reduces your monthly payment. It also boosts the speed with which you build equity. For instance, a 30-year mortgage with a 5.5% rate on a home that costs $100k has a total payment of $570. But that amount drops to $478 if you have a 4.1% rate.
How do you know if you should refinance for a lower rate? Check how interest rates are trending over the last month or so. If the rate is at least. 75% lower than what you have now, talk to your mortgage broker about refinancing.
If you would only save a few tenths of a percent, it may not be worth the expense to refinance. However, if you plan to stay in the home for many years, saving $50 or $100 per month on your payment may make sense.
Whether this small decrease in payment is worth the expense of refinancing usually comes down to how long you will live there. But you may not know for sure.
Converting An ARM
Another reason people refinance is to convert an adjustable-rate mortgage to a fixed rate. ARMS usually begin with lower interest rates but they tend to rise over time.
In 2022, interest rates are rising. With inflation such a concern, some believe the Federal Reserve will soon tighten the money supply and raise rates. If that happens, rising interest rates could increase the costs of holding an ARM.
If you have an ARM and want to refinance to a fixed rate, now could be the time to do it. Having a fixed rate mortgage in a time of an unpredictable economy could give you the piece of mind you need.
Home prices soared in 2021 as demand for homes went higher and inflation gripped the country. That means many homeowners have tens of thousands of dollars in higher equity than they did two or three years ago.
If you want to tap equity to pay off debt or fund a home renovation project, now could be the time before interest rates rise further. Using the money for home improvements is still tax deductible, so it’s definitely something to consider while rates are still low. But what should you do if you already have a low rate first mortgage? You should think about a second mortgage, either a home equity loan or a home equity line of credit.
A home equity line has a higher initial interest rate, but it’s fixed so you don’t have to fret about rising rates. A HELO has a lower initial rate but it can rise over time. Which is best for tapping your equity depends on your risk tolerance and income.
Time May Be Running Out to Refinance Your Mortgage!
While interest rates are still near historical lows, they started to rise in January 2022 as there is growing concern about the economy overheating with inflation. CNBC reported in January that the number of borrowers who may benefit from a mortgage refinance may have dropped because of rising interest rates. The news site stated that the average mortgage rate for a 30-year fixed-rate loan has risen at least 50 basis points since the start of 2022. That reduced the number of refinance candidates to about 6 million. This is a decrease from almost 11 million on Jan. 1, 2022.
CNBC added that people are defined as candidates for a mortgage refinance when they have a max 80% LTV and a credit score of at least 720, and could reduce their rate by .75%.
So, mortgage refinance applications have dropped from a year ago. This has affected mortgage lending volume, and there will be an effect on consumer spending that may hit in later 2022. Refinance mortgage rates have been bottoming out since the beginning of the pandemic, so many may have felt there was always time to refinance. Or maybe they thought rates would drop more.
However, many industry analysts say there still is motivation to refinance because homeowners in the US are sitting on trillions in equity. On average, homes gained $50,000 in value last year!
Even with the higher interest rates, millions of homeowners may still benefit from refinancing. Some say borrowers could save as much as $275 on average, or more than $1.5 billion overall. Of those borrowers, more than a million may save at least $400 per month.
Refinancing your mortgage in 2022 could be a wise move, depending on your current rate and situation. It appears rates will be rising for awhile on inflation concerns and potential Fed action.
Refinancing to a lower or fixed rate could be important to keep your costs down in uncertain economic times. It also can help you pull cash out to do a home renovation, which adds value to your home.
Of course, remember that refinancing can cost up to 6% of the loan amount. So you need to be confident you will stay in the home long enough to recoup your costs.
Use online calculators to simulate what your payments would be on lower interest rates to decide if you should move forward with your mortgage refinance.