Should I refinance now?
There is a distinct possibility that years from now we’ll look back at 2023 as the year of rising mortgage costs, a relatively brief period where interest rates rose near 8% and temporarily pushed homeownership out of reach for thousands of buyers. Deep in the rearview mirror of time, it will make quite a story.
But at the end of 2023, something interesting happened. Mortgage rates started to fall, in some cases by as much as 1% from highs experienced earlier in the year. For folks who’d closed on a loan over the previous year, this could be a golden opportunity to refinance—a list that may include you.
And that’s news to some homeowners who may be waiting for rates to get back down into the 3% range. Those once-in-a-generation mortgage rates may have passed them by, and they’d be missing the opportunity to save on their monthly payments now.
While there’s always some organization and effort required on behalf of the homeowner to obtain a refi, the benefits far outweigh the time commitment, especially when you’re working with an easy-to-use digital platform that makes getting a refi a simple, pain-free experience.
Refinancing and interest rates
It’s best to begin any refinance journey by understanding the relationship between the interest rate you received when you originally purchased your home, and the rates currently available in the marketplace. You’re looking for a lower mortgage rate, low enough that after closing costs and associated fees you can lock in tangible savings. Your lender can help with that.
Taking a step back for a moment, it’s worth outlining that there are four main costs that comprise your monthly mortgage payment:
Out of these four, the only one you can hope to alter with a refi is the interest payment. But that doesn’t mean a refi can’t deliver transformative savings. Interest payments, as any homeowner knows, are a substantial recurring expense and they can eat into monthly budgets with unerring regularity. Think about it for a moment: If you were presented with an opportunity to reduce the
amount of interest you pay by $50, $100, $200 a month, you’d certainly look into it, right? That’s the logic and appeal of a refi.
What kind of refinancing makes sense to you?
While most people do a refinance for the reasons just outlined, there are multiple motives for contacting your lender and refinancing your home.
For example, you may want to leverage existing equity as part of a cash-out refinance to help consolidate debts*, pay down college tuition or make a significant purchase such as an investment property. A cash-out refi can also help you access funds for home renovations—something that’s increasingly popular.
Then there’s the loan product itself. Maybe you’re apprehensive of a future spike in interest rates and want to get out of that adjustable-rate mortgage while the going is good. Many homeowners do just that and switch to a fixed rate mortgage with low interest rates and greater predictability.
Clearly, refis can be empowering; they allow for savings and they promote flexibility. Simply stated, a refinance is a whole new mortgage agreement. To simplify the process, try to find a lender with knowledgeable loan officers who can help you find a great rate.
Let’s take a deeper look at some of these refinance options.
This is your basic refi and it’s the one that most people are rushing to obtain while mortgage rates remain attractive. The appeal is considerable. Even by adjusting your mortgage rate by a mere 1.0 or 0.5% percent, you can reap considerable savings on both a monthly and annual basis—but the real savings is over the life of the loan. Sometimes many thousands of dollars can be saved.
Switch from an ARM to a fixed rate
An adjustable rate mortgage (ARM) certainly has its appeal. It’s a type of mortgage that combines an initial period consisting of a low fixed rate followed by an adjustable rate period for an agreed-upon set of years (typically, 5, 7 or 10) that resets every six months (or annually) based on general market conditions. During the adjustable period, rates can swing in either direction. This could mean savings or it could mean higher payments; no one has a crystal ball. For many people, even 50-50 odds aren’t optimal.
This is where a refinance comes in. Don’t like the original terms that set you up for 10 or 20 years of adjustable rates? No problem. Talk to your lender and change the terms (and if you like, the duration) of your mortgage.
Switch from a 30-year mortgage to a 15-year mortgage
Many homeowners are racing to refinance their home not only to get a more favorable interest rate or switch out of the unpredictability of an ARM, but also to change their amortization schedule to more rapidly pay off the loan in full.
That’s right. A refinance not only allows you to change from an ARM to a fixed rate (or vice versa) but also from a 30-year mortgage to a 15-year mortgage. This can be helpful in three key ways:
- A 15-year mortgage almost always comes with a more favorable interest rate.
- As you pay off your principal in larger chunks, you amass equity more quickly. This equity can be tapped for other purposes, if need be.
- A 15-year mortgage will allow you to pay off your mortgage more quickly, enabling you to put the bulk of homeownership costs behind you and begin enjoying your life without a mortgage hanging over your head.
And yes, monthly payments will increase as you transition from a 30- to a 15-year mortgage. However, if you’ve budgeted properly, it’s precisely the kind of opportunity cost you’re willing to make. An examination of personal finances is essential. For example, if your income has increased since you signed your original mortgage agreement, you may be in a good position to better absorb the increase, especially in light of a faster route to full ownership.
While not as common as a rate-and-term refi, the cash-out refi is a great way to leverage existing equity to acquire funds for home improvements, investments, one-off purchases or to consolidate debt and pay it off in one lump sum.
Because you’re reducing equity, you’re increasing risk, and lenders’ rates will reflect that. As a result, don’t expect to receive the same low rates that you would get with a rate-and-term refi. However, there may be other advantages. When seeking a cash-out refi for certain home improvements, there are potential tax savings that can be obtained. Inquire with your lender to determine if any tax-related savings are applicable to your circumstances.**
Like all the previously discussed refi options, a cash-out refi requires a completely new mortgage agreement as well as a thorough approval process that includes a credit check, credit score, an examination of debt-to-income ratio, income, available assets, etc. Making sure to get preapproved by your lender is a handy way to accelerate and optimize the underwriting process.
One particular point of interest for lenders is loan-to-value or LTV. For most conventional cash-out refinances done via the guidelines set by Fannie Mae and Freddie Mac, the maximum LTV allowed is 80% before you’re forced to purchase private mortgage insurance (PMI) to offset the additional risk. This means that you can tap a maximum of 80% of the existing value of your home (value determined by an appraisal—not original purchase price) while having established a minimum of 20% equity through principal mortgage payments.
Under this refi recipe, it will likely take at least a few years to achieve the requisite 20% equity necessary to qualify for a cash-out refinance. If your monthly statement says you’re somewhere south of that figure, you’ll need to find another way to procure the funds. However, once you’ve passed the 20% threshold, you’re eligible for the loan if everything else is good to go.
Refi: A few things to consider
Refinancing your home—for whatever purpose—has a lot going for it. However, there are a few steps you’ll go through before you can start saving on your monthly payments. Let’s look at a couple things to bear in mind when considering a refi:
- Appraisal: You will need to conduct a home appraisal at your own expense. Not a big deal, but it’s particularly important in the context of a cash-out refi as the appraised value of your home will determine how much money you can take out. While a well-maintained home in a nice neighborhood tends to appreciate, there are no guarantees.
- Credit examination: Maybe you thought you’d be exempt this time around having undergone this scrutinizing process during your original mortgage. Think again. Everything from your latest credit score, DTI, income and available assets will be reviewed to ensure you’re a low-risk candidate with proven creditworthiness.
- Closing costs: A refi isn’t an addendum to your original mortgage; it’s a whole new thing, and whether you're changing terms, changing rates or tapping equity for cash, your refinance will incur many of the same charges you had at the time of your initial mortgage, including closing costs that could total anywhere between 2-6% of the entire loan. This shouldn’t dissuade anyone from seeking a refi; it’s just prudent to know what’s in store.
- Seasoning period: Let’s say you just purchased your home and then read online that mortgage rates fell 1%; you might want to take the opportunity to lock in a lower rate by refinancing your mortgage, right? Good idea, but there’s a hitch: Although Fannie Mae and Freddie Mac don’t typically object, your lender may require a waiting period of up to 120 days before allowing you to refinance. This is the “seasoning period.” Choosing a new lender may alleviate that problem. Additionally, nonconventional mortgages such as those offered by the VA and FHA have strict seasoning periods of 210 days. For USDA loans, it’s 180 days.
Refi, FOMO and the lay of the land
A refi is an extremely valuable tool to leverage for savings and financial flexibility. And this opportunity begins with the American Dream of homeownership. From there, it’s about building up equity and waiting for the opportune time to contact a Proper Rate loan officer and jumpstart your journey to savings.
*Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principal amount and will be paid off over the full loan term. Contact Proper Rate for more information
**Proper Rate does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
For purposes of this example, only interest rate and down payment have been factored in. Check with your lender for a full list of available costs that may influence monthly mortgage payments.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Proper Rate for current rates. Restrictions apply.
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