Over the past year and a half, record-breaking interest rates—slashed by the Federal Reserve to stimulate the economy—have remained low with some fluctuation. Many prospective homebuyers and homeowners who are interested in refinancing their mortgage are likely wondering if the low rates will persist and whether now is the right time to take advantage of the low rates.
In all likelihood, interest rates will follow the recovery of the economy. If you’re wondering when to refinance your mortgage, you can take advantage of 2021’s low interest rates or you can refinance your mortgage when it is most suitable to your financial situation.
Not sure when that is? Here are five signs to identify when it could be time to refinance your mortgage.
1. You want to lower your interest rate and monthly payment.
This is one of the most popular reasons to refinance. Lowering your interest rate not only lowers what you pay on the house over the long haul, but it also lowers your monthly payments. This frees up your cash for other purposes, such as emergencies, college tuition, or retirement.
As you shop around, you’ll find that rates vary by loan product and lender. Typically, a community bank that provides refinancing is more likely to give you perspective and guidance based on their knowledge of the area and holistic understanding of the local community—something that can also be reflected in the rates they offer.
While mortgage rates have decreased considerably over the past decade, the trend varies often, usually on a weekly basis. To stay up to date, you can use online resources such as HousingWire to keep up with current rates.
2. You need to finance renovations and home upgrades.
Refinancing to pay for renovations, make repairs or upgrades, or expand on the existing home is referred to as a cash-out refinance—turning your home equity into cash. This allows homeowners to improve their property, making upgrades and additions so they can do things like accommodate elderly parents who might need more care and assistance, or earn passive income by renting out an accessory dwelling unit.
In this situation, homeowners use their homes as tappable equity, or the amount available before hitting a maximum 80 percent combined loan-to-value ratio. For example:
- A homeowner who owes $70,000 on a home valued at $250,000 will have $180,000 in equity.
- With a cash-out refinance loan, this equity can be liquidated if the loan is larger than $70,000.
Keep in mind that a cash-out refinance loan is dependent on a few things, including the mortgage lender, the refinance program, and other factors like the value of the home.
3. You want to get rid of mortgage insurance.
With some loan types, such as a Federal Housing Administration (FHA) loan, you currently have mortgage insurance required as part of your initial contract. There is an opportunity for you to get rid of your mortgage insurance if home prices have risen in your area, which likely means your property value has increased, too.
If this is the case, you probably have more equity in your home because of it. The additional equity presents an opportunity, if you have at least 20 percent equity in your home. In this case, you can refinance into a conventional mortgage, which does not require mortgage insurance, saving you the extra monthly payment.
4. You want to consolidate debts and loans.
Low mortgage rates have popularized cash-out refinances as an option for homeowners looking to pay off debt. With a cash-out refinance, you can tap into your home’s equity to consolidate debt into a single loan. The amount of equity you decide to cash in on is equal to the amount your mortgage would increase by.
If you’re considering a cash-out refinance, it’s important to know how much equity you have in your home. If you purchased your home via an FHA loan, you may be eligible to get rid of mortgage insurance (as discussed in the previous section). However, if you pull out more than 20 percent of your home’s equity, you may be forced to continue carrying that insurance.
Although it isn’t directly related to your home equity, you should also consider forming a plan of action to keep total debt low going forward, especially with high-interest debt such as credit cards and auto loans.
5. You want to purchase an investment property.
If you are interested in purchasing another piece of property, a cash-out refinance can help provide the down payment. This investment could be in a second home or a vacation home, or it could be a rental property that provides passive income that you could contribute to a college fund or retirement plan.
You’ve determined when to refinance your mortgage. What next?
You might now know when to refinance your mortgage, but taking the next steps could be confusing or worrying. Eliminate the worry by choosing a community banker and working with an experienced team that can walk you through the process of refinancing with terms that fit your financial needs.
For over 90 years, Crews Bank & Trust has provided financial services to customers. Our decisions have always been made with our local communities, people, and economies in mind, and we hope to do the same for you.
To get started on refinancing your mortgage, contact us today.
Important disclosure: The information provided in this material is intended for educational purposes and is not intended to provide specific advice or recommendations for any individual. While other traditional lenders participate in commercial bridge loans, Crews Bank & Trust does not offer bridge loans, nor do they offer soft and hard money loans. All loans are subject to credit approval.