Refinancing your mortgage can be a smart move. Sometimes, you can secure a lower interest rate, make your payments more manageable, or even access equity to make improvements or consolidate debt. However, figuring out whether it is the right time to refinance your home isn’t always easy. Interest rates frequently shift, and your financial situation (and credit scores) may be different compared to when you last got a mortgage, making it hard to predict what sort of rate or terms you may be able to access. Luckily, there are things you can do to figure out if now is the right time based on your unique circumstances. Here are some points to examine.
One of the biggest reasons people cite for refinancing is landing a better interest rate. Depending on your credit score and when you initially secured your last mortgage, now may or may not be a good time to refinance.
Usually, experts recommend only refinancing if you can get an interest rate that is at least one percent lower than your last one. If your credit score has improved – such as by going from 660 to 720 – then you might be able to just that. When your credit score is higher, you may be eligible for more favorable terms, though this can depend on how much it has gone up and how lending standards have changed.
Similarly, if mortgage interest rates have declined significantly since you locked in your last loan, you might be able to get a better one even if your credit score is unchanged. For example, the average rate in November 2008 on a 30-year fixed-rate mortgage was 6.03 percent. In 2018, the average rate sat at 4.54 percent; that’s a decrease of 1.49 percent.
Whether mortgage rates are in your favor depends on the interest rate currently associated with your loan and your credit score. You’ll need to examine your loan account and credit score to see if refinancing to secure a better rate is a smart move today.
Additionally, you need to consider the possibility that interest rates may rise throughout 2019, and possibly beyond. This could make acting sooner rather than later a better decision if today’s rates are lower than your current one. However, mortgage rate changes are somewhat hard to predict, so there is no guarantee that the upward trend will continue.
If you are currently paying off an adjustable rate mortgage – also known as an ARM – refinancing into a fixed-rate mortgage instead could be a smart move. Periodic rate adjustments can cause your mortgage payment to keep creeping higher, particularly if an upward trend continues.
However, it does mean you won’t automatically benefit from interest rate declines. An ARM interest rate can shift both upward and downward depending on market conditions, while a fixed-rate mortgage remains unchanged throughout the life of the loan. But a fixed-rate mortgage can provide you with peace of mind, as you’ll always know what you need to pay every month.
If you didn’t put 20 percent down when you bought your home, there’s a good chance that you are paying for private mortgage insurance (PMI). PMI gives the lender some additional financial protection in case you are unable to pay your mortgage, as there may not be enough value to cover the remaining principal on your loan.
Once you pay down your loan and have 20 percent in equity, PMI doesn’t automatically go away. Unless you refinance your mortgage, you could be paying this additional expense for the life of your mortgage.
By refinancing, you may be able to eliminate PMI as long as you maintain at least 20 percent of your home’s value as equity. Typically, PMI costs somewhere between 0.5 and 5 percent annually based on the original loan amount. If you originally financed $125,000 and have a PMI rate of 1 percent, your PMI payment would be $1,250 a year, or about $104.17 a month.
Getting rid of PMI can make refinancing a smarter choice even if you can’t reduce your interest rate by a full 1 percent.
Watch Out for Fees
If you decide to refinance, you are essentially applying for a new mortgage. As a result, you are going to encounter a variety of fees you’ll need to pay.
For example, lender origination fees can cross the $1,000 mark. While you can usually wrap these up into your mortgage, it will impact your monthly payment and the amount of interest that accrues.
There are also numerous third-party fees when you get a mortgage. You might have to pay for an appraisal out of pocket as lenders rarely allow that cost to get rolled into the loan. Lender title insurance fees can also get quite high, at times nearing $1,500. Escrow fees can be several hundred dollars, and the assignment recording fee can be a few hundred dollars more.
All of these fees add up, hence why experts usually only recommend refinancing if you get an interest rate that is at least 1 percent lower than your existing one. That way, what you save in interest usually outweighs the impact of these costs.
If you refinance your current mortgage into a longer term, either by starting the 30- or 15-year clock over or by flipping from a 15-year to a 30-year loan, you could end up with lower monthly payments. For homeowners who are struggling to make their current payment, this could provide some level of relief, as long as you don’t lose any savings through higher interest rates or lender fees.
Similarly, if you have equity you can tap, a cash-refinance loan could allow you to consolidate other higher interest debts. This is another path that can lower your total outgoing payments, which may make it easier to manage your budget.
Ultimately, whether now is the right time for you to refinance depends on your situation. Examine your interest rate, check your credit score, and see if you have PMI you could eliminate. If you have equity, you can also explore debt consolidation through a cash-out refinance to see if that improves your situation. Until you take a look at the entire picture, you can’t be sure whether refinancing is a smart move, so do a little research and decide from there.