Is this a good time to consider refinancing to a lower rate?

18 Mar

Mortgage rates have hit a record low after the US Federal Reserve drop rates to help combat the economic impact from the spread of the coronavirus. This can be a good time to consider refinancing to a lower rate and taking advantage of the savings a cheaper interest rate can provide.

Recently, the average interest rate for a 30-year fixed-rate mortgage fell to 3.29% while the 15-year rate dropped to 2.79 percent.

Real-estate data firm Black Knight analyzed data back in February and reported that more than 11 million homeowners could save an average of $268 per month on their mortgages if they were to refinance at current rates. This number has grown even larger as mortgage rates continue to fall.

“Almost anybody should be checking if there’s an opportunity to refinance,” said Tendayi Kapfidze, chief economist at LendingTree TREE in a recent Las Cruces Sun News article. “It doesn’t cost anything to talk to a lender and see what rate they might get you in this marketplace.”

While saving money by refinancing is always a good idea, it is not foolproof and comes with a variety of expenses. Refinancing your home can cost thousands of dollars in fees so it is a good idea to ask a few questions and give your finances a thorough look before refinancing your home loan. 

Here are a few questions you should ask before taking the plunge:

How long do I plan to stay in this home?

When it comes to refinancing a loan, you want to make sure that you are keeping the loan long enough for the monthly savings to exceed what you paid in closing costs. This means if you have plans on selling your home in the near future refinancing is not a great idea. 

Before refinancing determine what fees you will have to pay during the process and verify that the savings you will realize from the lower payment will cover your closing costs before you plan on selling your home. Depending on the amount you end up paying in closing costs, it may only take a few months to recover those fees or it could take years.

While it varies by individual circumstances, as a general rule of thumb, if you plan on selling your home in the next five years, it may not make sense to refinance your loan based on typical closing costs. 

On the other hand, if you are already living in your forever home you should absolutely consider refinancing or even consider moving to a 15-year mortgage if the numbers make sense. The average interest rate on the 15-year fixed-rate mortgage is almost always lower than the 30-year loan and is currently at 2.79%. 

While switching to a 15-year mortgage will increase your monthly payment, over time the savings will be much greater as you build equity faster and eventually pay off your home in half the time. 

Will I actually save money?

The answer to this question depends on your current rate. Everyone’s situation is different but in general, your new interest rate should be at least 50 basis points lower than your current one in order to make a refinance worthwhile. 

It’s important to remember that the rates advertised on the web are an average and you could end up paying more or less that the advertised rate depending on your personal factors. Contact a mortgage lender to get an idea of what interest rate you would qualify for, in many cases it can be even better than advertised rates. 

As with most products, it pays to shop around for a mortgage. Lenders have different systems for determining an interest rate which can result in dramatic differences. In addition, they can often adjust or discount your closing costs which can result in savings. Shop a number of lenders to see which one can offer the best package of interest rate and closing fees. 

Are you currently paying mortgage insurance?

Mortgage insurance is generally required or borrowers who have a Housing Administration (FHA) loan, or if they had a down payment of less than 20 percent. If you can refinance into a loan with more than 20 percent equity and lose the mortgage insurance, it is almost always worthwhile to refinance. 

In fact, dumping your mortgage insurance can be so beneficial that it can make refinancing worth it even if you don’t get an interest rate that is at least 50 points lower than your current rate. 

One other way to get rid of mortgage insurance is to put in some cash during the refinance process. A cash-in refinance allows you to put in enough cash (assuming you have it) to bring your equity level up to 20 percent so you can drop mortgage insurance. 

Do I have my finances in order?

In order to qualify for a refinance, you must have your finances in order. According to a study by LendingTree, one in four mortgage refinance applications are denied due to the borrower’s debt to income ratio being too high, poor credit scores is another major reason for denials. 

If your debt to income ratio is high or your credit score is less than stellar you may have to make some improvements before applying for a refinance loan. Pay down debt to lower your ratio before applying for new loan.

Pull your credit report and look for any mistakes. If you find any contact the credit reporting agency to get it corrected, this can immediately improve your score. Pay all credit cards on time and try to bring down your balances if you carry a lot of credit card debt. 

Do not apply for any new credit around the time you are hoping to refinance your mortgage, this includes new credit cards, car loans, and personal loans. 

If your credit rating has improved since your original mortgage you may be able to snare an even lower rate, a higher credit score equals a lower interest rate when it comes to mortgages.

Talk to your existing lender

If you are serious about refinancing, reach out to your current lender to see if they can help. They already have all of your personal information as well as your payment history and a vested interest in keeping your loan.

Refinancing with your current lender can make the process easier and more importantly, quicker. If they cannot match a deal from a competing lender or come close to the competing terms it may make sense to move. 

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