When Is the Best Time to Refinance Your Home?
In 2020, mortgage interest rates fell to record lows due to the outbreak of the coronavirus pandemic. Due to these low rates, there has been a major refinancing boom where countless Americans take out new loans on their existing homes.
With interest rates stabilizing in recent months around more normal levels (though they're still favorably low for homebuyers), it seems the rush on refinancing is finally starting to slow down.
If you have friends, family members, or neighbors who are refinancing, you might be wondering if it's the right choice for you. When is the best time to refinance your home, and when is it better to stick with your existing mortgage loan?
Let's take a look at everything you need to know!
Why Are So Many People Refinancing Right Now?
The mortgage insurance industry reached rates below 3% due to the coronavirus pandemic. However, these rates are beginning to increase once again. Throughout April 2021, the average cost of a 30-year fixed-rate mortgage were less than 3%, but this increase to 3.35% as of May 21, 2021.
Even though mortgage rates are starting to normalize, these averages are still better than in recent years. During the 2010, for example, the average was around 4% and even size 4.4% average for 30 year mortgages in2019.
When Does Refinancing Make Sense For You?
Your specific circumstances will impact whether or not refinancing is the right choice for you. You'll want to consider factors such as your personal financial situation, how long you plan to stay in your home, and your current loan rate, term, and type.
Consider Your Budget
When you refinance your home, you won't need to make a new down payment. However, refinancing is not free. For this reason, you want to make sure that you take into account the associated costs of home refinancing.
Know Your Debt-to-Income Ratio
Your debt to income ratio is an important factor in whether or not you are approved for financing. This is a ratio of how much money you owe compared to how much money you bring in. When you are applying for a mortgage, a 36% or less debt to income ratio is thought of as desirable.
If you have too much debt compared to your income for lenders to not see you as risky, it's worth taking the time to make your DTI more favorable. Remember, this isn't something that can happen overnight, as credit cards and other loan types typically only report to credit agencies once a month.
Think About How Long You're Going to Stay in the Home
Is the house you're in now your forever home or are you planning on relocating in a year or two? This is an important question when it comes to refinancing because depending on how long you're staying it may or may not be worth the time, money, and hassle.
If you know you're going to be moving in just a couple of years, it probably does not make sense for you to get a new 30 year refinance. However, if you are going to be staying for longer than 3 to 5 years, refinancing might make sense depending on the other factors involved.
It can be hard to predict the future. However, if you have a sense that you're going to want to downsize in just a couple years, maybe refinancing isn't the right call right now.
Determine the Difference Between Your Loan Rate and Market Loan Rate
You'll find different opinions about how much of a point differential you need to make refinancing worth it. Some experts say that a half-point or more makes refinancing worth the trouble, while others say you need to make a 1 or 1.5 point change to bother with the hassle.
Don't Try to Perfectly Time Your Refinance
It's easy to get obsessed with trying to perfectly time a refinance when mortgage rates are at their lowest. However, this is a lot like trying to time the stock market. The reality is, if the mortgage rates today can help you move closer to your financial goals or help you save money, then that's more important than trying to get the precisely lowest interest rate of the year.
Talk to an Expert
The underwriting process can be confusing, so you'll want to find a loan officer or another professional to help you navigate the situation. Doing so can help you get better loan terms when it comes time to refinance.
When Does it Not Make Sense to Refinance Your Home?
Refinancing isn't always the best option, and if you're not careful you can actually end up spending more over the life of the loan. Here are times when refinancing probably doesn't make sense.
If It Means a Longer Break-Even Period
It's important to be formulaic in understanding whether refinancing is the right option for you. One thing you will want to determine is how long it will take you to recoup the closing costs associated with refinancing. The break-even period is when you have fully offset how much it cost you to refinance.
Some people might be more or less comfortable with different break-even periods. You will want to definitely consider how long you are going to stay at the property, and how certain you are about your estimation of how long you will stay.
If It Means Higher Long-Term Costs
When you're thinking about refinancing, you'll want to ask yourself how much money it will cost you in the long term. If you end up spending more money over time by refinancing, it's probably not a good idea even if it lowers your monthly payments for now.
It's important to understand the way that mortgages work in order to understand how a lower interest rate loan could result in you actually paying more overall money.
Basically, when you make your monthly payments to a mortgage, most of the payments you're making in the first several years actually go towards paying the interest rather than the principal. If you've ever looked at your mortgage statement and wondered why it seems like the money you owe on the property isn't going down very quickly, that's why.
When you refinance, though, you're starting the mortgaging process over entirely. This means that if you're 15 years into a 30-year loan and finally starting to make a dent in the principal, refinancing will have you starting all over again paying brand new interest that wasn't a part of the deal before.
It's also important to think about the opportunity cost of refinancing. In order to refinance a mortgage, you will inevitably put quite a bit of time and money towards the process. Think about how much money you will be saving by refinancing and whether or not it's the best use of your time versus other options on the table.
If You Already Have a Low Fixed Rate Mortgage
While some experts say that reducing your interest rate by a half-point is worth the effort, you might want to think seriously about whether or not you want to go through all the hassle. While interest rates will ebb and flow over time, consider whether or not this time-consuming, stressful, and costly process is worth the outcome of a bit less money paid in interest over time.
It's also worth considering that refinancing isn't your only option when you want to pay less over the life of your mortgage. You might consider overpaying your mortgage every month and putting that money towards the principal. This can significantly cut down the length of time you have a mortgage if you start early on in the process.
When the Closing Costs Are Unaffordable
Refinancing costs money no matter what. Even if it is advertised as being free of closing costs, all that means is that you're paying in the form of a higher interest rate. Sometimes they will let you bundle the closing costs into the loan, but this just means that you are paying interest on those costs for the entire life of the loan.
Think seriously about whether or not you can afford several thousand dollars on closing costs right now or if that money would be better spent elsewhere. Be wary of rolling the closing costs into the loan. For example, for a loan with a 4.5% interest rate and $6,000 of closing costs bundled into the loan, you will end up spending thousands of extra dollars in interest on those closing costs alone over the term of the mortgage.
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If You're Moving Soon
If you're going to be selling your house soon, it's not the time to refinance. Moving is stressful enough anyway that you shouldn't lump on refinancing into the mix of things. Besides, there is very little benefit to refinancing right before you sell your house, so it's best to save the time, energy, and money for more important things.
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When Is the Best Time to Refinance Your Home?
The best time to refinance your home is when it will save you money and when you know you have a high likelihood of qualifying. When deciding whether or not refinancing is right for you, consider the following:
- Whether or not market interest rates have dropped
- Your credit has improved since you initially got the mortgage
- Refinancing could mean lowering your monthly payments
- You would like to switch from a variable-rate loan to a fixed-rate loan
- You want to remove a cosigner from a loan
If you have paid down quite a bit of the principal of your home, a mortgage lender might be willing to re-amortize your mortgage. You will also hear this referred to as "re-casting."
What happens in this scenario is that the lender recalculates your payment based on the remaining balance and years of your home loan. This can't be done with government-backed loans, though, and some lenders have minimum principal reductions that are required for qualifying.
How Long Does Home Refinancing Take?
How long it takes to refinance your home depends on your personal situation and your location, among other factors. Generally, though, it takes between 15 and 45 days to refinance a home loan.
The process consists of a number of different steps. These include:
- The application
- The underwriting process
- Home inspection and appraisal
- The Closing process
Unfortunately, you can always run into unexpected issues at any time in the process. While you can help prevent hold-ups by being organized and prepared, sometimes things simply cause delays that are out of your control.
Is It Time to Refinance Your Home or Is It Time to Sell?
The coronavirus pandemic has made many Americans rethink everything, from where they work and where they live to how they spend their time and what they want to do with their lives. If COVID-19 has left you itching to relocate, you might consider taking advantage of the current seller's market and move to your dream neighborhood.
If you're wondering when is the best time to refinance your home? but you're simultaneously thinking about moving across the state or the country, refinancing probably isn't the right call for you. It's possible that the path that makes more sense for you is to sell your current house and purchase a home in your desired location, for which you can snag some of those historically low-interest rates.
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