Ask These Questions Before You Apply
After mortgage rates fell to near-record lows recently, many homeowners raced to refinance their mortgages, taking advantage of a rare opportunity to save big.
Are you one of them? Or has something kept you from pulling the trigger?
Although interest rates aren’t expected to skyrocket anytime soon, they may tick up in 2017.
Mortgage agency Freddie Mac says the average 30-year mortgage rate is still near its three-year low. But the group predicts an increase to 3.7 percent next year.
The current state of mortgage refinance rates is not the only factor to consider.
Ask yourself the following questions to determine if now’s the right time for your new mortgage.
Will It Free Up My Finances?
Refinancing can firm up your financial footing.
A few reasons you might act now include:
- You’re paying a higher-than-market rate
- You have an adjustable rate mortgage (ARM)
- You want a shorter loan term
- You carry high-interest, unsecured debt
In these cases, refinancing may be a very smart move.
When you refinance out of a high rate, you drop your payment. That’s the obvious reason to refinance. But you may be able to accomplish this goal, simultaneously taking advantage of other benefits.
ARM loans certainly come with low rates. The 5-year ARM is a much-overlooked product, especially for first-time home buyers.
However, they do come with inherent risks. If, in the future, rates rise dramatically, it could spell steadily rising monthly payments for the homeowner.
A fixed-rate refinance would lock in housing costs for up to 30 years.
Even better for some homeowners, a 15-year loan term can save upwards of six figures. The loan term cuts in half, eliminating years of interest payments.
A 15-year fixed mortgage helps you build equity faster, too.
Equity is becoming more prevalent in today’s housing market, and more homeowners are tapping into it to pay off high-interest debt via cash-out financing.
A cash-out refinance gives the approved applicant funds at closing for any purpose. Imagine paying off a 17.99 percent credit card with a 3.75 percent mortgage.
The monthly savings could be in the hundreds.
So, take a look at your finances. Decide for yourself: will this refinance move you toward your financial goals?
If yes, then it’s time to apply.
What Are My Financial Priorities?
Force-rank your financial priorities in order of importance.
For example, you have plans to do the following: Pay a child’s college tuition; book a vacation for your 20-year wedding anniversary; remodel the kitchen; pay off consumer debt.
You wouldn’t mind retiring a little early, either.
But your priority list might look something like this:
- College tuition
- Kitchen remodel
- Zero credit card balance
- Retire early
If you have the cash to do it all, great. If not, find out how a refinance can help, according to your priorities.
For instance, choose a 10- or 15-year mortgage if retirement tops the list.
A short-term loan gives you the lowest possible rate, and eliminates the mortgage sooner.
But payments would higher. That could make the rest of your items harder to check off.
In the hypothetical, force-ranked list above, college is your top priority. A cash-out refinance could make strides toward that goal.
You could knock out numbers two through four as well, if you have considerable equity.
As for retiring early, increasing your loan balance might set you back.
On the other hand, reducing your rate while taking cash out leaves you with a similar, or only slightly higher, payment.
Make extra mortgage payments each month, now that you’re not paying high-interest consumer debt.
You might just clear your entire list with one new mortgage.
Can I Eliminate Mortgage Insurance?
The most recent Case-Shiller Index shows U.S. home values up almost six percent for the 12 months ending in June. Many “underwater” homeowners have resurfaced.
Over the past few years, no- and low-downpayment programs have all but become the norm.
In fact, very few young buyers make a 20% downpayment.
According to mortgage software firm Ellie Mae, buyers under the age of 37 put ten percent down on average, and many of them put down much less than that.
The HomeReadyTM mortgage, for instance, requires just three percent down. FHA loans — a product nearly 40 percent of young buyers use — is approved with just a 3.5% downpayment and credit scores as low as 580.
These low-downpayment loans and similar programs often require mortgage insurance. This type of insurance is not “bad,” contrary to common misconceptions.
After all, it can give you a shocking return-on-investment. How?
Say you pay $150 per month in mortgage insurance. That’s $1,800 per year.
That same year your $250,000 home appreciates six percent – the national average. That’s $15,000, or an eight hundred percent return on investment.
Mortgage insurance allows you to buy before saving your twenty percent down, and, arguably, is one of the better investment “bets” out there.
While mortgage insurance makes sense for many home buyers, why not eliminate it altogether, if you can?
Many homeowners have achieved more than 20 percent equity in their homes in a few short years. They could eliminate this additional expense through a refinance.
You can refinance out of an to cancel mortgage insurance forever.
Conventional loan mortgage insurance can be canceled without a refinance. However, your current lender might resist the proposition.
In that case, a refinance could lower your rate and eliminate your PMI too.
What Is My Break-Even Point?
You break even when monthly savings pay for refinance costs. For example, if your refinance costs $2,000 and your savings equal $100 a month, you’ll recoup your costs in 20 months.
Find out the date at which your savings kick in. Unfortunately, some homeowners think they’ll never recoup their closing costs because they rely on flawed formulas that have been floating around for decades.
For example, some break-even formulas simply presume the following.
- Homeowners will never refinance again
- They will never move or sell the house
- Mortgage rates can’t go any lower
These assumptions could be wrong. As such, make your refinance decision based on your situation. Ask yourself these questions.
- Will I relocate for work in the next five years?
- Will I upsize or downsize soon?
- Will I need a large sum of cash for any reason?
- Will my income increase or decrease in coming years?
Your end goal with these questions is to determine how long you will keep the new mortgage. If not very long, consider hanging onto your current loan.
Can I Get A Zero-Closing-Cost Refinance?
If your out-of-pocket costs are zero (with no higher loan balance), your break-even point will be month one.
It’s hard to argue against such a scenario.
And, it might make sense to refinance even if the interest were reduced by just a fraction of a percentage point.
Keep in mind, though, how a no-closing-cost refinance w0rks. In general, a lender might offer you two choices: (1) receive their lowest available interest rate by paying closing costs, or; (2) pay a higher rate without any closing costs.
You pay for your refinance with a higher-than-market rate.
But today’s slightly higher rate is lower than those of recent (and long-past) history. If you purchased or refinanced in the last few years, your savings could be significant.
A no-closing-cost loan can make the refinance decision an easy one.
Should I Be In A Fixed Rate Loan?
The answer, according to the vast majority of real estate experts, is yes.
Although mortgage rates are low today — and likely to remain low for a while — there’s no guarantee. If rates were to rise in a year or two, your monthly payments would increase.
The fact that today’s rates are near historic lows is all the more reason to switch to the security of a fixed rate loan. Even if rates continue to fall, you could always refinance again for a better rate.
If you have an ARM, you have little to lose by refinancing to a fixed-rate mortgage. Many ARM loan holders today qualify for a similar — or better — fixed rate.
What Are Today’s Refinance Rates?
Check today’s rates, and decide whether it’s a good time for you to refinance. You know your situation best, and you can make the best decision.
Get a quote now. You can get started without a social security number, and there’s never any obligation to continue if you are not completely satisfied with your rate.