With home loan interest rates seeming to hit lows often, it can be maddening for homeowners who want to refinance their mortgage at the lowest interest rate they can find. What’s low today could be lower tomorrow.
When, exactly, is the best time to refinance your mortgage? It all depends on your situation and reason for refinancing. Getting a lower rate is probably the main reason people refinance their home loans. But there are others. Here are eight of them, starting with the most obvious one.
Lower interest rate and lower payment
Refinancing to a lower interest rate will save you money — on your monthly mortgage and interest paid over the life of the loan.
“Once people decide to refinance to satisfy a need, they still need to get a loan done successfully,” says Todd Huettner, president of Huettner Capital in Denver. “Most people focus on the rates and fees without realizing they can often save far more and have a better experience by structuring their loan properly and creating a lock plan to determine when to lock, at what rate, and for how long to lock.”
Huettner recommends finding your “target rate.” First, determine your “regret rate,” or “the rate at which you would be mad you could not get tomorrow,” he says.
“The reason for this is that many people say they just want the ‘best rate,’” Huettner says. “However, this is impossible to clearly define. Therefore, it is an unachievable goal leaving people dissatisfied with the outcome most of the time. You only know if it is the ‘best rate’ in hindsight and even that changes with time.
If you’re not happy with a rate a lender offers you, or it won’t lower it when you’re finding lower rates elsewhere, you can still shop around for a lender after being preapproved for a loan.
Do it before rates rise
It can pay to look ahead. If your current rate is higher than 5 percent, you may be able to find a lower rate to justify refinancing through 2019.
A survey by the American Bankers Association predicted that sub 5-percent rates will persist throughout 2019. The economists predicted that the 30-year fixed-rate mortgage will rise to 4.7 percent by the second quarter of the year, then to 4.86 percent in Q3, and ending the year at 4.91 percent. Rates will be at around 5.05 percent in the first quarter of 2020, they say.
“One key to note in a rising interest rate environment is for people to not move their thinking to what they need today,” Huettner says. “With rising rates expected to continue in the long run, think ahead a year or more to see what types of benefits you could gain from refinancing and do it today to get a lower rate.”
Reduce or shorten PMI
It has been six years since the Federal Housing Administration, or FHA, changed its rules requiring mortgage insurance for the life of the loan if you put less than 20 percent down on the loan.
If you refinance to a lower rate and shorten the loan by a few years to a 15- or 20-year refi, you can get rid of private mortgage insurance, or PMI, and still possibly take cash out of your home.
Rising home equity
If you put down less than 20 percent on your home and have an FHA loan, higher home equity could put you close to refinancing out of an FHA loan so you can get rid of monthly insurance premiums. You don’t have to refinance your home loan to get this benefit, though you can refi for this and other reasons.
If you live in areas where home values have been appreciating the most — such as California and New York — you could be at 20 percent equity already.
A 2018 report by ATTOM Data Solutions found that 24 percent of all U.S. properties were equity-rich during the second quarter of 2018. California had the highest share, followed by Hawaii, Washington state, New York and Oregon.
If you can reduce the interest rate on your mortgage and still take cash out of your home to pay off bills or make home improvements, then a cash-out refi could make sense. One thing to be aware of is that this usually involves refinancing your mortgage for a larger sum than what you owe now, and your house is still collateral for the bank.
You may be able to qualify for up to 80 percent of the home’s loan to value, or LTV. Having a good credit score will help you get the best deal.
Smart ways to use the money from cash-out refinancing include paying off high-interest debt such as credit cards, and making home improvements.
Moving from ARM to fixed rate
Having floating rates on an adjustable rate mortgage and be nerve-wrecking and expensive if an ARM is adjusting upward. Dropping to a fixed-rate loan can be cheaper if you plan to stay in your home for awhile.
Reduce loan term
A loan with a shorter term typically has a more attractive interest rate, so shortening the term of the loan can significantly decrease the amount paid over the life of the loan.
Jeff Neal and his wife Jennifer in saved about $75,000 in interest by switching from a 30-year mortgage at 4.5 percent to a 15-year one at 3.8 percent interest on their home in York, PA. Their monthly payments increased from $1,450 to $1,715. They found some extra savings of about $150 a month by paying off a chunk of the principal and getting rid of PMI.
It cost the Neals about $3,800 to refinance, requiring a little more than two years to recoup that investment.
Buy out ex-spouse
If your home is co-owned by a spouse or someone else, you may want to refinance the loan to get them off it.
“Most of the time in divorce, one spouse must refinance the other off the existing loan if they keep the home,” Huettner says. “People may also need to refinance if they own a property with a friend, relative, significant other, or a business partner.”