Mortgage rates have been climbing since January, and there is no indication that they'll reverse course this year. Should homeowners refinance now before it's too late?
Refinancing your home loan at the right time can save you a significant amount of money, but that doesn’t make a refi the right answer for everyone.
Several factors influence whether you should refinance right now or wait out the current trend of rising interest rates.
Is This the Right Time to Refinance?
According to the National Association of Realtors, pending home sales fell to their lowest level in three years in January. This is partly due to rising mortgage rates, which raise the long-term cost of homeownership and can discourage many potential buyers from entering the market. The short supply of available housing has also driven housing costs higher. As home values and interest rates both increase, existing homeowners in need of refinancing will need to act quickly to get the best deals.
The current average rate for a 30-year fixed mortgage is 4.4%, according to national data published by S&P. Comparatively, mortgage interest rates averaged 4.1% and peaked around 4.3% last year. For homeowners with fixed-rate mortgages paying more than the average, refinancing now could make plenty of sense.
Following the Federal Reserve’s January meeting, the central bank announced that if economic conditions continue as anticipated, there will be multiple interest rate increases this year—in fact, Fed officials have predicted at least three rate hikes in 2018. If you're hoping to get a lower interest rate on your mortgage, you should either act soon or prepare to wait much longer.
Who Should Refinance?
Refinancing your home loan entails paying off the original mortgage and starting a new one. Homeowners refinance for many reasons: Some look to obtain a shorter term or a lower interest rate, while others refi to convert to another mortgage type or to cash out their home’s equity.
If you're considering any of these reasons, today's rising rate environment means that you should either refinance now or expect to wait much longer for rates to fall. You should think about refinancing your mortgage if:
- You will need cash for a large expense this year: Refinancing your mortgage at a higher amount than what you owe on your home will allow you to withdraw the difference in cash. You typically need at least 20% equity in your home for a cash-out refinance. If you're planning to do a cash-out refinance, remember that interest rates are likely to rise throughout the year. It would be better to refinance now at a lower rate.
- You bought your home when interest rates were high: Interest rates are climbing, but they are still near historic lows. If you bought a home around 2008 with a 6% interest rate, for example, you could save a significant amount by refinancing now. You could also wait for a long-term decrease, but a sustained period of growth doesn't mean that the trend will reverse itself anytime soon. If you're dealing with a steep interest rate, you could certainly save money by refinancing to the current 4%-4.5% range.
- You can access a zero-cost closing for a lower rate: Many homeowners hesitate to refinance due to the closing costs, which can amount to as much as 3% to 6% of the loan’s principal. Sometimes, those costs can be waived, but you will likely have to accept a higher interest rate in exchange. But if your current loan has an interest rate of 5.25%, and a proposed loan has a 4.5% rate with no closing fees, it’s a good deal. Take advantage of that opportunity before rates increase again.
What to Watch Out For
Refinancing means you’re applying for a new mortgage, and it requires the same thorough process as when you first closed on your home.
Your credit score will play a major role. Boost your score as much as you can before you refinance. If you have an excellent score, you'll be eligible for the most competitive interest rates. If your score has taken a hit since you bought your house, refinancing is likely to hurt you rather than help you save money on your mortgage.
Refinancing also requires you to pay closing costs, which can amount to 3% to 6% of the loan principal. If you are considering refinancing, don’t forget to factor that cost into the overall amount that you'll save by refinancing. Sometimes you may not come out ahead.
Be careful if you plan to refinance to cover major expenses, like college costs or a home renovation project. Some homeowners think this is a wise choice because they see these costs as investments or because the mortgage interest rate is lower than that of other loan types. But using your home equity to fund major purchases means you might be overwhelmed by your loan payments later. Crunch the numbers ahead of time, and make sure the decision fits your financial game plan.
Deciding to Refinance
Regardless of what rates look like, refinancing your home loan isn't a guaranteed win. Whether you should refinance right now will depend on your reasons for doing so. Pay attention to the interest rates, keep a close watch on your credit score and remember to account for the closing costs you pay when refinancing.
Getting your mortgage refinanced at the wrong time or for the wrong reasons can have a serious impact on your bottom line.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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