Now may be a good time to refinance, whether you want to lower your mortgage payment or tap into your home’s equity.
Mortgage rates today are at all-time lows. It’s a great time for current homeowners to think about refinancing. Even if you’ve never thought about refinancing your mortgage before now, it’s a time to explore your options.
What is Refinancing?
When you refinance, you pay off your existing mortgage with a new mortgage. This new mortgage could have a lower rate or be for a higher loan amount. It depends on your intended purpose.
For example, do you want to save money each month? Refinancing for a lower rate accomplishes this. Even if you save 0.5% - 1.0%, your payment will drop. How much do you need to save? Look at the big picture too. Yes, your monthly payment drops, but look at the total interest you’ll save over the loan’s term – the number may shock you.
Do you need to take money out of your home’s equity? This is the difference between your home’s value and your current mortgage balance. Lenders allow homeowners to borrow up to 80% of the home’s value. If you owe less than 80%, you can borrow that difference.
Homeowners use equity for these reasons and more:
- Consolidate high-interest debt
- Make home improvements
- Pay for college
- Have an emergency fund
How to Refinance
If you remember the mortgage process when you bought your home, refinancing is similar. You’ll complete a loan application, provide proof of your income and assets, and pay for a home appraisal.
Lenders use this information to make sure you qualify. Each lender/loan differs, but on average, aim for:
- 660 credit score or higher
- 43% debt ratio or lower (divide your monthly debts by your gross monthly income)
- A home value that supports the refinance (rate/term refinance you only need 3% equity, but cash out you need more than 20% equity)
- Stable income and employment
- No recent derogatory records, such as collections, bankruptcy, or a foreclosure
- Proof of assets (sometimes called reserves or liquid assets on hand)
If lenders approve your application, they’ll process the loan and at the closing, they’ll pay off your existing mortgage. Any money over the disbursement amounts is yours.
Should you Refinance?
Here’s the bigger question. Should you refinance?
It depends on your reason. If you’re lowering your rate and/or trying to save money, calculate your break-even point:
Total closing costs/Monthly savings = Months to break-even
This is how long it would take you before you paid off the closing costs with your monthly savings and started earning the savings (money in your pocket). Compare the break-even point to your plans. Will you be in the home long enough to enjoy the break-even point? Is it worth it?
If you have any thoughts about refinancing, now is the best time. The rates are lower than we’ve seen in decades. Whether you want a lower payment or need your home’s equity available, take advantage of the low rates and savings while they last.