Since the COVID-19 pandemic hit the US markets in March, the mortgage rates have dropped to record lows. According to data from Freddie Mac the 30-year rate mortgage decreased to 3.03% and a 15-year mortgage to 2.51% last week. These are the lowest in Freddie’s survey which dates back to 1971. According to Seth Sprague, principal at Stratmor Group, “the rates will grind lower.” Even if your home loan is as recent as last year, it may be a good financial move as you can save even more by exploring the loan options. (Check how much you can save now on ratebeat mortgage ).
Many homeowners may be uncertain as to whether they should refinance as they have limited knowledge of what is involved in the refinancing process. So, if you find yourself considering your options, here are five scenarios that indicate refinancing is the right choice.
Your Home Is Financed At A Higher Rate
The starting place to consider whether you should refinance is if the mortgage rates have gone down enough to make monthly payments smaller or it gets paid off earlier. If your mortgage loan is over 4% then it is worth considering a refinance as even a half or three-quarters of a point reduction in your interest rate can save you significant money over the life of the mortgage. For example, if you can save say about $720 a year (i.e. $60 per month) for every $100,000 you borrowed early last year, then you could save almost $20,000 in interest over the life of the loan. You can even refinance your FHA loanwith an FHA streamline refinance.
The main reason perhaps, why many people decide to look into refinancing is that they can get that lower interest rate. Go to https://ratebeat.com/refinance/ to calculate the numbers for your scenario.
Your Credit Score Has Increased
If your credit score was not so good or average when you first bought your house it has likely improved recently. This will be beneficial as you can qualify for a refinance with a better interest rate and also lower your monthly payment. If you have paid off say some of your credit cards or a huge car loan, then, you will be in a better position to lower your monthly payments with an interest rate that will reflect your current situation. However, even if your score needs some improvement here are some tips to improve it quickly :
- Pay off your credit cards and reduce your credit utilization. This is the percentage of the available credit you are at present using.
- Do not close old credit cards that you are not using, as long as you are not being charged any annual fees. It will help lower your credit utilization and in turn, increase your credit score.
- Check your credit report for any errors and if you do find any do alert the credit bureau so that it is fixed and removed from your report.
Mortgage lenders also take into account your debt-to-income ratio which is the percentage of your monthly income (before taxes) that goes to pay your debts like student loans and credit card balances. The ideal DTI (debt-to-income ratio) is under 36%.
You Have Build Up Home Equity
In the last decade, many homes have increased in value. If this is the case with you then you can consider a cash-out refinance. This could be a great financial move to accomplish your goals as they are often lower than a home improvement or other short term loans. It will make sense to cash out some of your house equity to pay down any high-interest debt or pay for major expenses like education, additional home improvements, buy an investment property, or start a new business. You will need to make only one payment every month instead of multiple payments. However, it will mostly depend on what you wish to achieve, and if you can manage your debts responsibly.
You Have An Adjustable-Rate Mortgage (ARM)
If you currently have an adjustable-fixed rate mortgage that will soon be adjusting its rate upward, then, now is the right time to refinance it into a fixed-rate loan. The interest rates are low and locking into a fixed rate will help you stay at the same rate for the whole mortgage period. This will protect you from the rising interest rates in the coming years. Additionally, a fixed-rate mortgage will make it easier for you to plan for and budget.
You Plan To Stay In Your Home For A Few Years
You could truly save money by refinancing your mortgage to a lower interest rate if you plan to stay at your home long enough to recover the closing costs. For example, if you save say $200 per month and the closing costs are $4800 in fees then it will take you 2 years to recoup the costs. So if you do not intend to move or resell within the next two years, then refinancing your home will be the right choice to save money.
If you are thinking of refinancing your mortgage, reach out to us today. We will consider all the relevant factors and help you find a refinancing solution that is best suited to your unique needs.