Should You Refinance When Rates Rise?
It’s no secret that mortgage rates are on the rise. In reality, according to the latest figures from Freddie Mac30-year rates recently saw their strongest rise since 1987 before reaching 5.81% on 23 June.
If you are a homeowner, you may be wondering: did I miss the opportunity to refinance?
Mortgage expert Ivan Simental addressed the subject on a recent episode of The Mortgage Reports podcast — and what he says might surprise you.
Listen to Ivan on The Mortgage Reports podcast!
Should I refinance? It depends
To refinance or not to refinance? For some, Simental says, it’s probably not the best time. For others, though? It depends on their unique scenario.
“With interest rates on the rise, now is probably not the best time to refinance for many homeowners,” Simental says. “However, the calculation is not always as simple as comparing a new interest rate to the old one. Other factors must be taken into account. »
These factors include:
- How long you plan to be in your home
- The total cost of your refinance
Specifically, Simental says, you want to make sure you’re in the house long enough to recoup your refinance costs. “When you refinance your mortgage, it typically costs between 1.5% and 4% of the loan amount, although it depends on the state.”
That would be about $10,000 on a $500,000 mortgage. You want to be in the house long enough for your refinance to save you at least $10,000 to make this move worthwhile. This is called your “break even point”.
“Refinancing might not be the smartest idea if you’re planning on moving in the near future,” he says.
Five examples of when refinancing still makes sense
Despite rising interest rates, there are still scenarios where it makes sense for some homeowners to refinance. According to Simental, these reasons include:
1. Lower your interest rate
The main reason to refinance would be to reduce your interest charges.
“If rates have gone down since you bought, you can do a rate and term refinance and just get a lower rate and payment,” says Simental. “As a general rule, it’s better if you can lower your interest rate by 0.5 to 0.75 percentage points, so 6% to 5.5% or 5.25%.”
Even when rates hit 5%, there were still over a million borrowers who could lower their rates and save money through refinancing. This could be true if you bought your home before 2008 or if your finances have improved since you bought your home, allowing you to qualify for a lower rate now than you could initially.
You also want to make sure you’re in the house long enough for your new interest rate to save you more than the cost of refinancing you need to run.
While you can technically factor your closing costs into your loan amount, they add to your balance and interest charges over the long term, so it’s important to do the math and make sure it’s worth it. sadness. A good mortgage advisor can help you crunch the numbers and see if it would make financial sense in your scenario.
2. Consolidate Higher Interest Debts
Refinances can also be good debt consolidation options, as mortgages generally carry lower interest rates than other financial products, such as credit cards and personal loans, for example.
“You can use cash refinance to tap into your home’s equity and pay off higher-interest debt,” Simental says. “You can use the money to pay [those debts] down or completely.
This would lower your long-term interest costs and free up monthly cash flow, which you could then save or invest in other projects.
3. Get rid of mortgage insurance
If your current loan has mortgage insurance, refinancing can help you get rid of PMI and lower your monthly payment. You just have to wait until you have at least 20% equity in the property (when your mortgage balance is 80% or less than the appraised value of the house).
Getting rid of mortgage insurance could save you around $1,000 to $2,500 a year on a conventional $300,000 home loan.
“If over the last year or two your home has gone up in value and you now have that 20% equity, you can refinance and get rid of your private mortgage insurance,” says Simental.
On average, the PMI costs about $30 to $70 per month for every $100,000 borrowed on a conventional mortgage. This means that if you have a $300,000 home loan, removing the PMI could save you around $90-210 per month or $1,000-2,500 per year.
With those kinds of savings, it may not take long to recoup your refinance costs and see a net financial benefit.
4. Switch from an adjustable rate mortgage to a fixed rate mortgage
If you have an adjustable rate mortgage, refinancing might also make sense, especially if your fixed rate period is about to expire.
“Let’s say you got a seven-year variable rate mortgage, you’re in year 6.5, and your mortgage will soon adjust to a much higher interest rate,” says Simental. . “What you would do is refinance and turn it into a 15, 20, or 30 year fixed mortgage, and you don’t have to worry about the rate adjusting.”
Fixed rates are higher today than they have been for the past two years. But they could still rise – and homeowners who lock in interest rates today might be happy that their rate doesn’t adjust even higher later.
5. Shorten the term of your loan
Shortening the term of your loan can also be a good reason for a refi. While switching from a long-term loan to a short-term loan (such as a 30- to 15-year loan) will not reduce your payment, it will reduce your long-term interest costs. It may also entitle you to a lower interest rate, which will save you even more in the long run.
As Simental says, “It could save you thousands of dollars.”
When is refinancing a bad move?
Essentially, Simental says, if you’re planning to move soon and aren’t sure you’ll break even on your costs, it’s probably not a smart move to refinance.
If your credit is poor, refinancing might also be ill-advised. “It’s about your credit being good enough to qualify for the right refinance loan,” Simental says. “After all, the best rates and terms go to those with the best credit.”
If you’re unsure whether refinancing makes sense for you, contact a mortgage professional for expert advice. They can run the numbers and see if refinancing would work in your favor in the long run.
As Simental says, “In general, if refinancing saves you money, helps you build equity faster, or pay off your mortgage faster, it’s a good decision.”
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.