It’s still an incredible time to refinance
Refinancing has boomed in the last year, and it’s no wonder why. With rates at historic lows and homeowners sitting on record amounts of equity, many borrowers have saved thousands.
And if you haven’t refinanced yet? It’s not too late. Over 15 million homeowners are still ‘in the money’ to refi according to data firm Black Knight.
As mortgage expert Arjun Dhingra says, now may be the perfect time to do it.
Listen to Arjun on The Mortgage Reports Podcast!
Low rates won’t stick around forever
Refinance rates have been pretty low for the last year. But as Dhingra put it in a recent episode of The Mortgage Reports Podcast, “Inevitably, the music will stop.”
That point may come sooner than most homeowners hope.
The Federal Reserve has said it will start tapering off its purchases of mortgage-backed securities by early next year. When that happens, it will send mortgage rates upward.
“By pulling back or kind of taking off the training wheels — or not throwing as much coffee into the economy to keep it propped up and caffeinated — that’s going to inevitably cause mortgage rates to start trending up,” Dhingra said.
“That is going to take place sometime in 2022, as [the Fed has] announced.”
What does that mean for homeowners? Essentially, it means the clock is ticking on today’s low rates.
4 Reasons to refinance right now
According to Dhingra, there are four categories of homeowners who should consider a refinance right now, before rates start to creep back up.
Do you fall into one of these buckets? If so, you may want to contact a mortgage advisor to discuss your options.
1. Your mortgage rate is 3.25% or higher
If your rate is still above this threshold, there’s a very good chance you can refinance into a new mortgage with a lower rate — and considerably lower at that.
The average rate on 30-year mortgage loans was just 2.86% in mid-September, according to Freddie Mac.
If you dropped to 2.86% from 3.25% on a $250,000 loan, the move would save you significantly, both on your monthly payment and over time.
Keep in mind, too, that these rates are only averages. That means the most qualified borrowers — with plenty of home equity and high credit scores — can potentially get even lower interest rates.
2. You need a more affordable monthly payment
Need more cash flow? Struggling to pay the bills? Dealing with reduced hours or wages at work?
By refinancing into a mortgage loan with a lower interest rate or longer payoff term, you could lower your mortgage payment considerably. The monthly savings would free up cash and alleviate some of that financial stress.
Of course, refinancing involves paying closing costs. The upfront fees can be a barrier for some homeowners with restricted cash flow.
Luckily, you don’t always have to pay closing costs out of pocket. It’s often possible to include these fees in your loan amount or get the lender to pay them in exchange for a slightly higher interest rate.
These no-closing-cost refinance strategies will cut into your savings. But if your new rate is low enough, you could still see a financial benefit overall.
3. You want to pay your house off faster
If you’re nearing retirement or make more money than you used to, you may want to refinance into a shorter-term loan. The mortgage payments will be higher, but you’ll own your home free and clear much sooner (and avoid those costly housing payments in retirement).
As an extra bonus, rates on shorter loan terms are often lower.
This doubles down on your savings potential over the life of the loan. You’d be saving money by paying off the home sooner, and saving even more by dropping your mortgage rate further.
4. You need cash now
You can also think about a cash-out refinance, which lets you replace your current mortgage loan with a larger one, taking the difference back in cash.
“Right now, homeowners are sitting on a record amount of liquidity and equity in their homes,” Dhingra said.
“So if you need it to pay off debts or to just create a little bit of an emergency reserve fund? Those are all reasons in which you should consider that type of a refinance.”
Funds from cash-out refinances can be used for virtually everything — from medical bills, to tuition, to paying off debt, etc. You can even use the cash as a down payment on a new home or vacation property.
Other good candidates for a mortgage refinance
The most common reason homeowners refinance is for a better rate and lower monthly payment. But a new loan can help you accomplish other financial goals, too.
For example, you could:
- Switch from an adjustable-rate mortgage to a safer, fixed-rate home loan
- Cancel mortgage insurance on an FHA or USDA loan by switching to a conventional loan with no PMI (20% equity required)
- Switch from a 15-year mortgage to a 30-year mortgage if you need to lower your monthly mortgage payments considerably
- Remove an ex-spouse or co-borrower from your current loan
Regardless of your goals, make sure you compare a few different mortgage lenders before your refinance.
Mortgage interest rates vary a lot by lender. So even though rates are near record lows, not all lenders are necessarily offering great deals.
By comparing rates and fees from just 3-5 lenders you could find a better deal on your refinance loan and maximize your savings.
Should you refinance? Get personalized advice
Today’s mortgage refinance rates are at historic lows. Home values are up. And homeowners have more equity than ever.
This has created a unique situation where millions of borrowers could refinance into a lower-rate loan, cash out equity if they desire, and improve their overall financial situations.
If you’re not sure refinancing is the right move for your household, contact an experienced mortgage advisor for help. They can point you toward the best strategies for your goals and budget.