If you have a mortgage, it’s almost certainly one of your most significant financial burdens. When mortgage rates fall, it can be enticing for homeowners to want to refinance their mortgage to secure better rates. The question is whether it’s the right time for you to refinance.
If you have good credit, a consistent job history, and want to lock in lower interest rates, now might be a good time to refinance and enjoy the financial benefits of a refinanced mortgage.
If you’re asking yourself, is now a good time to refinance? Here’s how you can decide if refinancing your mortgage benefits you.
When Refinancing is Right For You
There are numerous ways to go about refinancing your mortgage. Getting the right loan for you depends on your personal finances and financial goals. Perhaps you want to go from an adjustable-rate mortgage to a fixed-rate mortgage with a more stable monthly payment, or maybe you want to shorten your loan term from 30 to 15 years to realize savings on interest charges over the life of the loan.
Other homeowners may want a lower monthly mortgage payment to free up more cash for other costly expenses, like a vehicle loan or their children’s college tuition. Or perhaps they’ve reached 20% equity in their house and wish to do away with their private mortgage insurance through refinancing. Others may take advantage of Freddie Mac loans to help facilitate their homeownership or take out a home equity line of credit to use the equity in their home to help pay for home improvement repairs and other expenses.
The majority of homeowners choose rate-and-term refinance, which changes the interest rate, term, or both of their mortgage, without advancing additional money. They choose this option to lower their interest rate and secure a more comfortable repayment term.
On the flip side, some homeowners opt for cash-out refinance, where new money is advanced on the loan, and the homeowner gets cash at closing along with their new home loan. This allows the homeowner to use the money toward credit card debt or pay for home renovations or other major expenses. Because this type of refinancing involves the homeowner borrowing more than they owe on the home, however, this option carries higher interest rates than rate-and-term refinancing.
Whatever the case, there are several factors homeowners should consider before refinancing their home loan. On the whole, if refinancing can help save you money, build equity, or pay off your mortgage quicker, it’s a smart choice.
Here are some times when refinancing may be the right option for you.
You Have Good Credit
If you have maintained good credit or recently taken steps to boost your credit score, you’re more likely to capitalize on lower interest rates by refinancing. If your credit score has dropped only slightly, it may still be worth shopping around to see if you can secure lower rates with credit unions like T&I Credit Union.
On the flip side, if your credit score has dropped since you financed your original mortgage, it’s less likely you’ll be able to take advantage of lower rates based on your credit situation. Plus, the hard inquiry on your credit during the refinancing process will likely impact your score even further.
You Have a Consistent Job History
Job stability and steady income is essential for refinancing your mortgage. If you’ve maintained consistent jobs and stable income since you financed your previous mortgage, you’ll be in an excellent position to refinance.
If you lack a steady income or the proper documentation that shows your proof of income, or uncertain about your employment situation in the months ahead, it’s probably best to wait a year or so until you can prove to your lender that you have stable earnings in order to qualify for the best rates and terms.
You Have a History of On-time Payments
If you’ve been able to make on-time mortgage payments and have been diligent about staying on top of your credit card, student loan, car, and other payments, this will reflect well on your credit score and enable you to get approved during the refinancing process.
On the other hand, if you’ve struggled to make payments on time, lenders will see your history of late payments, and it won’t bode well for refinancing your home loan. If your credit score has decreased as a result, it’s still worth checking what rates you can secure based on your current credit situation and to do whatever you can to continue to boost your score.
Your Total Monthly Savings Offset the Cost of Refinancing
To determine if refinancing is right for you, it’s good practice to crunch the numbers with a mortgage refinance calculator to see if your total monthly savings offset the cost of refinancing. To calculate potential savings, add the refinancing costs, including appraisal, origination fees, closing costs, and more. After getting pre-approved and finding out what interest rate you qualify for on a new home loan, you can calculate your new monthly payment and see what you could save each month.
You’ll also want to determine whether you have at least 20% equity in your home and check property values nearby to assess how much your home might appraise for.
What is a Good Mortgage Rate?
When the Federal Reserve lowers short-term interest rates, many homeowners assume mortgage rates will automatically follow. But the two don’t always go hand-in-hand. Mortgage refinance rates change multiple times every day, so a rate you saw or read about, or were quoted and got excited about, may not last.
Your home loan refinance rate is primarily based on your credit and the equity in your home. So long as you have a strong credit score and proof of steady income, you’re likely to get a competitive rate. The important thing is not to feel rushed, as mortgage experts expect low rates to stick around for the near future.
How Long Does it Take to Refinance a Mortgage?
The time it takes to refinance your mortgage depends on the lender you choose and how long the inspection, appraisal, credit checks, and other requirements take to complete. Most lenders can give you an idea of how long this process will take, but the mortgage process moves relatively quickly with more advanced systems. Thanks to online applications, the ability to scan documents on your phone, collect e-signatures, and more, many refinances can be completed within 30 days.
However, because of a boom in the real estate market amid the Coronavirus pandemic, as well as a drop in interest rates, more homeowners are buying homes or refinancing their mortgages. With this high volume of eager homeowners entering the mortgage process, it’s reasonable to expect that you may run into some delays during the refinancing process.
The Bottom Line
Ultimately, the right time to refinance your mortgage depends on your fiscal situation and monetary goals. Before you opt to refinance, determine how long you plan to live in your house and have a strong understanding of your credit situation. If you have strong credit, steady income, and want to lock in lower interest rates or shorten your loan term, now may be the right time for you to refinance.
At T&I Credit Union, we can help you save money by lowering your interest rate sooner and helping you pay below the industry average on closing costs. Call us at (248) 397-9571 to discuss refinancing your mortgage and how we can help you meet your financial goals.