Refinancing replaces your current mortgage with a new one that has better terms and a lower interest rate. Refinancing can lower your monthly payments and even cash out the equity you’ve built. But do you know when to refinance? Let’s go over the best time to upgrade your mortgage.
The Benefits of Refinancing
First, it’s important to know why you’re financing. Need money for renovations? Want a lower monthly payment? Your reasoning will determine what kind of refinance loan is best.
In general, refinancing is all about saving you money – usually by lowering your mortgage interest rate. With a lower interest rate, you owe less in monthly payments. That puts more money back into your pocket each month, which you can then save, spend, or invest. If you do a cash-out refinance, you can use your built-up home equity to get even more money.
Refinancing can do the following:
• Lower your interest rates
• Lower your monthly mortgage payments
• Change the loan duration (shorter if you want to pay it off faster for a higher monthly bill; longer if you want smaller payments)
• Free up money for other investments or home renovations through home equity
• Help you save money in the long term
Even if you have a fixed-rate mortgage, you may want to look at refinancing to find a lower rate than what you’re paying now.
When should I refinance?
The “when” part of “when to refinance?” refers to two things: when your personal financial situation allows it and when lenders offer favorable terms.
Check your finances
The rule of thumb has always been that it’s the right time to refinance when you can drop your interest rate by a percentage point or more. Depending on the size of your loan, refinancing may be feasible even if rates only drop half a percent.
Furthermore, you need to have built up home equity. Home equity is the percentage of your home that you truly own, so it builds the longer you have your home and the more payments you make. The minimum for a regular rate and term refinance is usually 10%, but cash-out options require at least 20%.
Finally, you have to know the market rate for your home. Have prices in your area gone up? Have they gone down? This can all affect interest rates, so you may want to get your home appraised if you’re unsure.
Look at the market
In general, financial institutions determine mortgage interest rates by assessing how risky it is to lend to you. To do that, they look at general economic factors and your individual financial history.
Lenders also based mortgage interest rates on a few different economic factors, including inflation, how much investors are willing to put into mortgage-backed securities, the stock market, and rates at the Federal Reserve. These forces are out of your control, but it’s helpful to monitor them. They’re also incredibly complicated – so if you need help understanding the market, you should reach out to a financial adviser.
Outside of the overall market, most institutions require you to have a credit score of 740 or higher. If your score is 640 or higher, you’re eligible for a Federal Housing Administration mortgage, which is offered by many different lenders. If your credit score is lower than 640, you’ll have to ask individual lenders what they can offer you.
If you’ve got good credit and consistently make payments on time, lenders may decide you’re not a huge risk.
Is there a best time of year to refinance?
You may have heard that it’s better to refinance during certain seasons or times of the year. It’s not because lending institutions feel more generous in the winter – it has to do with home buying trends.
Home buying tends to slow during the winter. To make up for that, financial institutions offer more favorable rates to increase demand and encourage people to buy. That means you could negotiate for lower interest rates than you could get during high-demand summer months.
Despite this, you shouldn’t feel limited to winter to look at refinancing. It’s smart to regularly check in on mortgage interest rates throughout the year. Interest rates fall when the market booms, which can happen at any time.
When should I not refinance?
There are certain situations where you shouldn’t refinance even if you have good credit and the market is in your favor. It might not be a good idea to refinance if:
• You’re planning to move soon. You need time to recoup closing costs and other fees after refinancing. That can take months or years.
• You can’t afford the closing costs. It can cost between 2 and 6% of the loan principal to refinance. If you don’t have that cash available, it’s likely not a good idea to refinance.
• You’ve been in your house for less than 12 months. Most lenders require you to have your current mortgage for a year before letting you change it. We’ve talked about how soon it’s okay to refinance before.
• You don’t have at least 20% in home equity. That’s what you’ll need to be eligible for cash-out refinancing. You build equity the longer you have your house.
Is it okay to refinance during the COVID-19 pandemic?
Right now, financial institutions everywhere are struggling to meet high loan demands with smaller staffs. That means it may be difficult to refinance in today’s current financial environment.
Mortgage rates have been falling in general, but we still don’t know how the COVID-19 pandemic will affect things in the long term. Interest rates are low now (which generally signifies a good time to refinance), but some institutions aren’t equipped to handle non-essential requests at the moment.
Almost all financial markets right now are fluctuating from day to day. Market volatility doesn’t mean you can’t refinance – it just means you need to be very careful. Always read the terms and conditions of your refi agreement before signing, especially these days.
If you’re a Florida homeowner and need help understanding when to refinance, contact an Associates Home Loan expert at (813) 328-3632. A member of our team can help you explore different options and figure out the best solution for you.