Is now the time to refinance? Five things to consider
Mortgage interest rates are hovering near historic lows. At many lenders, rates are well below 4 percent. For a brief period in March, rates even dipped briefly below 3 percent. Not surprisingly, many homeowners are asking themselves, “Is now the time to refinance?” The answer is … maybe. Before you consider refinancing your existing mortgage, consider the following:
Do the math
Sure, current mortgage interest rates are attractive. But the truth is they’ve been low for several years. Before you rush to consider a refinance, take a close look at your current interest rate. It might already be fairly low. There are many factors to consider when refinancing a mortgage. While the interest rate is important. Closing costs and how long you plan to stay in your home are important, too.
Work with a professional loan officer to understand the total costs associated with a refinance, which typically include credit checks, appraisals, origination fees and other closing costs. Next, determine how long it will take to recoup those costs through a lower interest rate. For example, if you expect to incur $2,500 in closing costs, but will save $150 a month by securing a lower interest rate, it could still take nearly 18 months to recover your closing costs. The key is to determine how long you plan to own your home. If you plan to sell in a year or two, a refinance may not make sense. If you plan to own your home for several more years, you may want to go for it.
Not all lenders are created equal, nor are the interest rates they offer. Rates can vary from one financial institution to the next. Do your homework and shop around for the best rate. Interestingly, because of the spike in demand for refinances, some lenders are purposefully keeping their interest rates high as they struggle to keep up with demand. Ask lenders if the interest rates they offer are higher because of supply-and-demand issues.
Mortgage interest rates can change quickly. A rate that may seem promising one day can be gone the next. At some lenders, rates have even been changing by the hour. What to do? Decide in advance on the interest rate you are comfortable with. When that rate becomes available at a trusted lender, jump on it.
Explore a cash-out refinance
With interest rates so low, and with many families needing an infusion of cash, cash-out refinances are seeing a resurgence in popularity. Particularly for those who are planning to do home improvements or want to pay off existing debt, this type of refinance can reduce monthly expenses considerably.
With a cash-out refinance, homeowners tap into their homes’ equity by taking on a larger mortgage in exchange for access to that equity in the form of cash. When does a cash-out refinance make sense? For homeowners who have a need for cash, and have enough equity in their home (typically no more than 80 percent loan-to-value), a cash-out refinance during a time of lower interest rates can be a good solution.
Has your home gone up in value? Eliminate private mortgage insurance (PMI)
Many homeowners, particularly newer homeowners, are familiar with private mortgage insurance (PMI). That is the insurance that many lenders require homeowners to purchase until they have paid off enough of their mortgage to reach 20 percent equity in their homes. Often, a refinance can result in the elimination of PMI. That is because homes are typically reappraised during a refinance. If a home has increased enough in value to cause the homeowner’s equity to reach the 20 percent threshold, PMI can be eliminated. With PMI often costing between .5 percent and 1 percent of a total mortgage loan amount, that can result in potentially saving hundreds of dollars each month. [Source: Investopedia]
In this low interest rate environment, a refinance can be a great solution. Do your research to find the best rates and work with a lender you trust to guide you through the process. At Alerus, we’re here for you every step of the way.