Mortgage rates are at historic lows but does that mean you should refinance? The 30 year fixed rate mortgage averaged 3.97 % on Sept. 20th down from 4.3% on May 1st.
Mortgage rates remain near the lowest levels they’ve been over the past 3 years. For example, a year ago rates were as high as 4.69 %. Applications for mortgage refinance have been increasing and there are currently about 3 times as many applications compared to the same time last year.
Let’s look at some reasons you might want to refinance:
- You can get a better rate.
- You credit score is higher. If you credit score has significantly improved the lender might extend better terms than you got the first time around.
- Your ARM is about to adjust. Adjustable rate mortgages come with an initial fixed rate period where the rate is lower than a true fixed rate option. If your ARM is about to adjust you want want to consider refinancing to a fixed term mortgage.
- You want to reduce the length of your loan. If you took out a loan in the early stages of your career a 30 year mortgage might have made sense. However, if you want to pay off your mortgage sooner than reducing the loan term can be a good idea.
- You want to consolidate your first mortgage and your home equity line of credit(HELOC).
- If you combine both of these into one monthly payment you can simplify your finances. HELOC’s also often have adjustable rate so consolidating here can potentially save you in the long run.
- You want to switch from an adjustable rate mortgage to a fixed rate mortgage. With an adjustable rate mortgage your payment can go up or down depending on how rates change. Moving to a fixed rate loan can keep your monthly costs the same and give you a more predictable cost structure.
- You need money for a big expense. If you need money for one of life’s big expenses, you can do a cash-out refinance.
- In a cash out refinance you borrow more money than the current loan amount on your home and the difference is given back to you to use however you wish. This refinance option is often used to pay for big ticket items like college tuition, home remodeling expenses, consolidating high interest debt, and medical bills.
- You need to pay less. If you suddenly need to pay less on your mortgage due to a change in income or added expense refinancing can be a good way to put money in your pocket.
- If you have enough property appreciation or principal paid off may not be required to pay private mortgage insurance (PMI) which will reduce your total monthly payment.
Before you refinance though you should consider a couple things. How many years remain on the loan and how long do you plan to live in the home? If you plan to move in the next couple years it might not be a good idea to refinance. You should also compare the cost of a new loan to the amount of interest it will save you. Refinancing can cost anywhere from $1,200 to $1,500.
Now that you know why you might want to refinance let’s go over how you should go about it.
Working with an experienced, honest, responsive loan officer with a great track record is important and required to help you through the process. Jack Skovgard has been working with clients for all their mortgage needs for years and is the perfect resource to guide you in this process. Here is a brief summary of what the refinancing process looks like:
Step 1 - Understand your current mortgage. Review the terms of your current mortgage.
Step 2 - Shop for rates and get pre-approval. This is where you actually work with Jack Skovagard for refinancing.
Step 3 - Compare your costs. You can use Jack’s mortgage calculator to determine how much money you’ll save under these new terms, then compare that with your total costs (more about that below). If you want the most accurate quote possible, contact Jack so he can run the numbers for you.
Step 4 - Gather your documents. Once you actually apply for this loan you’ll need a number of documents to prove your identity and financial situation. These typically include: Recent tax returns; W-2 or 1099s from at least one, preferably two, years; recent pay stubs; recent bank statements; an accounting of all current debts; proof of payment on your current mortgage. (FHA & VA loans have streamlined refinances that require less documentation, contact Jack for more details)
Step 5 - Application and appraisal. Once you’re ready to start, complete a refinance request to begin.
Step 6 - Close on the refinance. Sign the paperwork and fund the loan.
There are several ways to refinance your mortgage but let’s briefly run through the top three ways.
1) Refinancing with a conventional loan. This is the most common way to refinance and usually the cheapest option for most borrowers. The more equity to have the easier it is.
2) Refinance with an FHA loan. The Federal Housing Administration doesn’t actually make loans but they guarantee that private lenders will be repaid even if the borrower defaults. But you do have to pay for that guarantee in the form of monthly mortgage insurance. With a government guarantee, banks and mortgage companies can make loan they normally would not at competitive rates that can reduce your costs by a lot.
3) Refinance with a VA loan. A VA loan is one of the best mortgage programs around. Veterans and active duty members as well as those in the National Guard and Reserves are eligible. The Dept. of Veterans Affairs stands behind these loans so they are less risky for lenders and you can have less equity and lower credit scores than you would need for conventional loans and still get approved.
So who should consider refinancing right now?
Anyone who bought a home or opened a mortgage in the last 1.5 years are prime candidates for a refinance. Unfortunately many homeowners may not be aware of that. People that opened a mortgage in 2018 are more likely to have higher rates and would be eligible to refinance but they may not be aware of it. A general rule of thumb is that the rate on the market need to be 50 basis points lower than your current mortgage rate for a refinance to make sense.
The annual average rate for 30-year, fixed-rate mortgages offered through 2018 was 4.54%. That’s roughly 94 basis points above where rates currently stand. That means people who financed a home purchase last year at those rates could potentially save thousands of dollars by refinancing at current rates.
Also, borrowers who didn’t take advantage of the sub-4% mortgage rates available from 2014 to 2017 could also benefit financially from refinancing now as well.
So homeowners who could benefit from a refinance shouldn’t wait to begin starting the process even if they think interest rates will go even lower.
Waiting for a lower rate is a complete gamble for a home buyer. Even a small increase could negatively impact your refinancing calculations and change the outcome. The cost of waiting could be higher than the cost to put yourself in a better position right now.
If you decide on refinancing keep in mind that you will need to have some patience. Lenders on average are taking 30-45 days to process refinance applications.