You’ve probably heard it by now – interest rates are higher than we’ve seen in decades, with no relief coming anytime soon.
If you were thinking about refinancing but haven’t yet pulled the trigger, you may wonder if now is the time or if you should wait.
Most homeowners with a mortgage only consider refinancing when interest rates drop. They know they can save money on their payment, so they jump at the chance to refinance at a lower rate. A study by the Federal Reserve Bank of Boston found that the average homeowner saved $300 a month by refinancing when rates were low.
Although we’re no longer in a period of historically low-interest rates, that doesn’t mean you shouldn’t refinance your home.
Here are a few reasons you may want to refinance your home, even if interest rates are higher today:
You Have High-Interest Consumer Debt
If you have a lot of high-interest credit card debt, you might save money refinancing it into your mortgage.
In today’s economy, it’s more important than ever to be mindful of your finances. If you’re like many Americans, you may be carrying a balance on high-interest credit cards. This can be a costly burden, as credit card companies typically charge interest rates of 20% or more. However, there is a way to save money on your credit card debt.
If you have equity in your home, you can refinance your mortgage and take out cash to pay off your credit cards. Since the interest rate on your mortgage is usually much lower than the interest rates on your credit cards, this can save you money in the long run.
So if you’re looking for a way to save money and get out of credit card debt, refinancing your mortgage could be the answer.
You Have an Adjustable Rate Mortgage
If you have an adjustable-rate mortgage that is due to adjust soon, it’s likely that your interest rate is about to go up. This makes now a good time to consider refinancing into a fixed-rate mortgage.
Adjustable-rate mortgages typically start with a lower interest rate than fixed-rate mortgages, but the rate can change over time. This can be risky if rates go up, as your mortgage payments could become unaffordable.
With a fixed-rate loan, your interest rate will stay the same for the life of the loan, no matter what happens with the broader economy and the financial markets.
Refinancing into a fixed-rate loan can provide peace of mind and can help you budget more effectively for your future, as you’ll always know how much your mortgage payments will be.
You Want to Get Rid of PMI
You might want to consider refinancing if you currently pay PMI or mortgage insurance on your home loan and want to eliminate it.
If your home has appreciated in value since you purchased it, you may now have enough equity to refinance into a conventional loan that doesn’t require mortgage insurance. This may decrease your payment or at least eliminate the insurance payment, allowing you to put more money toward your principal.
You Want to Improve your Home
Refinancing might make sense if you want to make home improvements that will increase your home’s value. However, if you don’t have the cash to pay for the renovations and must borrow the funds, a mortgage may offer the lowest rate despite its higher rates than the last year.
Reinvesting the funds back into your home is one of the best uses of a cash-out refinance, as it increases your net worth almost instantly.
What to Consider Before Refinancing
Because rates are much higher, you should make some careful considerations before moving forward.
How Long will you Remain in the Home?
Before refinancing, think about how long you’ll be in the home. Then, since you’ll pay closing costs, the refinance should make sense.
For example, if you plan to move in a couple of years, you might not save much from refinancing the home. Even if you use the funds to pay off consumer debt, the closing costs will likely outweigh the savings on the credit card interest.
Make sure it makes sense to refinance based on your plans to stay in the home.
Can you Afford a Shorter Term?
It rarely makes sense to restart your existing term. For example, if you already have a 30-year term but paid ten years on it, restarting with a 30-year loan is like paying your mortgage for 40 years.
If you refinanced to eliminate mortgage insurance or to get out of an ARM loan, you might not save much because you added ten years to your loan.
Make sure before refinancing that you can afford a term equal to or less than the time left on your current mortgage.
Are you Saving Money?
Before you refinance, look at the big picture. Your payment likely won’t be lower with today’s rates, so figure out why you’re refinancing and if this is the cheapest option.
It could be the best way to achieve your financial goals if you can lower your term and minimize your closing costs. The key is to look at the loan’s total costs, not just the closing costs. How much will the loan cost over its entirety?
Compare that number to what you’d pay in credit card debt or any other loans you’d borrow to achieve your financial goals, such as renovating your home.
Ways to Get the Best Rates
Even though rates aren’t going to be as low as they were last year, you can still maximize your chances of getting the lowest rates available today with the following:
- Maximize your credit score – Improve your credit score as much as possible. Take care of any negative credit information, such as late payments, collections, or overextended credit lines, and let your credit score improve.
- Reduce your debt ratio – Keep your monthly debts as low as possible. The less debt you have monthly, the easier it is to afford the higher interest rate and still get the best rates lenders can offer today.
- Keep as much equity as possible in your home – The lower your loan-to-value ratio, the better the rates lenders can offer. So if you’re taking equity out of your home, leave 20% or more to ensure you get the lowest rates.
- Stabilize your employment – Lenders like stable employment. Of course, they prefer at least two years at the same job, but if you have an even longer employment history at the same job, it can work in your favor.
Final Thoughts
Mortgage rates aren’t nearly where they used to be, but that doesn’t mean there’s no reason to refinance.
While refinancing may not be ideal for everyone in the current higher interest rate environment, it can still be an excellent way to reach your financial goals under the right circumstances. The key is to minimize your closing costs by providing great qualifying factors and taking a short-term mortgage. Also, use the funds wisely by paying off much higher-interest credit card debt or reinvesting in your home. Doing so will help you save money in the long run and reach your financial goals more quickly.
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