In recent years, people have put down their 20 percent under the mantra: Buy now, refinance later. A USA and World News Report indicates an eye-raising 84 percent of home buyers planned to refinance. Although more than half said they regretted taking out a mortgage when rates were high in 2023, interest appears to be on the mend. With interest rates dipping to their lowest in more than a year, this may be the best time to refinance.
Understanding Refinancing
Refinancing a mortgage entails applying for a new loan that replaces an existing one. Homeowners typically consider refinancing when it furthers their personal and financial goals. Common reasons include lowering monthly payments, taking out a larger mortgage to turn equity into cash, or switching from a variable to a fixed-rate mortgage. There are also an untold number of unique reasons to make a change.
It’s important to keep in mind that mortgage holders do not necessarily get a free pass when they replace the initial home loan. You will be subject to processing fees and closing costs, among others. Potential borrowers would be well-served to conduct thorough due diligence before signing on the proverbial dotted line. Some large corporate lenders seem to offer low rates. These cheap loans are usually offset by unusually high and sometimes hidden fees. Be sure to weigh all the costs and pertinent factors when refinancing your mortgage.
Refinancing Factors
Perhaps the best time to refinance is when enough factors come together to make it a lucrative, money-saving proposition. This does not necessarily mean homeowners with high interest rates should sit and wait until they hit rock bottom. Taking advantage of borrowing opportunities sometimes means taking proactive measures. Whether that involves doing your homework or reconfiguring your financial portfolio, these are factors and solutions to consider when preparing to take advantage of the best time to refinance.
Interest Rates
Interest rates may be in retreat at any given time, but that doesn’t mean you can count on a steady decline. Using a mortgage calculator, run the numbers on your current loan. Input the loan amount, down payment, interest rate, terms, and check the monthly installment figure for accuracy. When you have the numbers in order, review the amortization amounts. This highlights factors such as the total interest paid over the life of the loan and the mortgage’s total cost.
Run the numbers on an anticipated refinance with a lower interest rate. After inputting those digits, the amortization analysis will provide different figures. If the second pass is lower than your current loan, simple subtraction will tell you how much you can save.
Length of Your Loan
The length of your refinanced mortgage is another discretionary factor. It’s not uncommon for people to refinance and change the number of monthly payments. Take some time to switch up the repayment period in the calculator and weigh it against total interest and overall loan repayment costs.
Your Monthly Payments
When borrowers agree to 30-year repayment terms, that helps maximize the total interest paid and cost. Reducing the number of installments lowers the total interest you will dole out. The opposite also holds true. Should you decide to extend the terms, you will pay more interest. However, this option reduces the monthly payment and may give you some needed wiggle room in your monthly budget.
Equity
Home equity remains a driving factor when refinancing a mortgage. The difference between the amount owed on the loan and fair market value can be put to work. For example, cash out home equity loans are designed to allow qualified borrowers to take out a larger loan and pocket a lump sum from a portion of the equity. The funds can be re-invested in upgrades such as a kitchen remodel, an expansive bathroom, debt consolidation, and other expenditures.
Credit Score
Your credit score will play a big role in qualifying for a low interest rate. Lenders prefer applicants with FICO scores of 620 or higher, though community-oriented organizations may exercise some discretion. If you are in the planning stage, request a credit history report from the three major reporting bureaus: Experian. Equifax, and TransUnion. You are entitled to a free credit report once every 12 months by filling out the online form at Annual Credit Report.
Check the documents for errors and omissions, and request changes if you notice any discrepancies. You can also take a deep dive and clear up any blemishes that could improve your credit score in 30 days. A robust credit score has a direct impact on the interest rate you receive when taking out any loan.
The Best Time to Refinance is Unique to Your Needs
There is no right or wrong time to refinance your mortgage. Reasons such as saving money make low-interest opportunities the best time to refinance. But, if you need to leverage equity for cash in hand, the best time may very well be when a need arises. If you have questions about when and how to refinance your mortgage, a local refinance specialist can help.
CCCU Can Help You Refinance Your Mortgage
When it comes to choosing the best mortgage refinancing option to fit your needs and lifestyle, it’s best to work with a lending professional like one of our Mortgage Specialists. Our mortgage team will listen to your needs and goals, and offer refinancing solutions that can help you achieve your financial goals.
If you still have questions about whether now is the best time for refinance for you, download our free checklist "Refinancing Your Mortgage: A Comprehensive Guide to Help Leverage Your Home's Value"
