Interest rates are down to 18 month lows so it’s a great time to look into refinancing, especially if your financing was done in Fall 2018 when rates were at our highest point in the last eight years, says Sarah Lindsey of HomeLoanGal , a mortgage planning firm in San Diego, California.
But, before you dive in, there are a few things to consider.
Travis Gillespie of Morgan Home Loan Funding in San Diego, encouraged consideration of these points before diving in to a refi:
If it provides you a benefit, or you have a necessity, then refinancing your mortgage might be an option.
Deciding on a refi should be first based on your goals. Is the goal to stay in your house forever? Pay off your mortgage by retirement, sell in just a few years and downsize? Start with what your goal is, then see if a refi makes sense.
Travis shared a key point here: Remember, a refi restarts the mortgage clock unless you choose to refinance into a shorter term. But, if you are cutting your monthly expenses as a result of the refi, you can turn around and apply that monthly savings to your mortgage. Or, use it for other goals.
What sort of benefits should you be looking for? A drop in rates by .5-1%, depending on where you live and the size of your mortgage. The average loan size Travis sees is $450,000. A .5% drop in rates with no additional costs means $130-$150/month savings. If your loan is larger, the savings may be much more with a .5% decrease in rate.
Sarah added that if you have an adjustable loan product or multiple loans on a property that you are thinking of consolidating, it’s a good time to look at refinancing. If you are also looking into tapping into some of your home’s equity by pulling cash out, it’s a good time to look at a full refinance or just opening a line of credit. The mortgage deduction tax laws have changed for certain cash out loan transactions so it’s good to look at how that impacts this decision as well.
Sarah mentioned that she’s doing a number of no-cost refinances for her clients who financed their homes at the higher rates of Fall 2018. No-cost refinancing means financing with no closing costs. These programs are higher rate programs that offer a credit from the bank to cover the costs of the transaction. These options should be weighed against locking in a lower rate with closing costs to see what fits best in your financial goals.
Refinancing into a lower rate can also be an opportunity to refinance into a shorter term. Again, deciding on this will depend on your personal financial goals.
Another consideration is the process that is required for the type of loan you have. Refinancing a VA loan has a very different, and less cumbersome, process than refinancing a conventional loan. Travis pointed out that the benefit of lower rates and more potential cash flow of a refinance is not enough for some borrowers who may not want to go through the arduous process of required paperwork, appraisals, and approval. You have to weigh the benefits and costs.
The VA loan process is quite simple relative to conventional loans and only requires a current credit score to determine rate and approval. No appraisal is required, no confirmation of income, or bank statements, and the paperwork for the process is very modified relative to conventional loans. However, in order to refinance a VA loan you must have 210 days between loans and have made at least six payments on the current loan.
Conventional loans will require the borrower to go through the entire loan process. That being said, this process has been streamlined in the past five to six years as a result of Automated Underwriting, which evaluates borrower risk. This process provides automatic approval or denial of the refi. In addition, 30-40% of those approved will not need an appraisal, further speeding up the process and reducing the paperwork.
Another thing to consider when thinking about a refi is your credit score. For conventional loans, 740 is the credit score you want as your minimum. Borrowers with a 620 credit score may pay as much as .625% more for a loan than someone with a 740 score. VA loans are more lenient with respect to credit scores, and the minimum here to shoot for is 720.
One last consideration Travis shared was the amount of equity you bring to the table at the refinancing. This will also impact the rate. The more equity you have, the better the loan. This can especially help the rate of someone with a low credit score.
And finally, we’re hearing the Fed talk about potentially cutting rates. Should you wait? Here’s what Sarah had to say:
“It’s really difficult to predict the mortgage interest rate market. Interest rates are based on the supply and demand of mortgage bonds, and when there is economic uncertainty or political chaos, bond investments are the safer choice for investors and that normally bodes well for interest rates. We do have an election year coming and as long as inflation stays in check, rates should stay low for awhile. Will they continue to drop is hard to say. I tell clients that if the numbers make sense to refinance now, then do it. Lock in savings while you can and if they continue to go down you could always look at refinancing again in the future.”
Whether it is the right time for you to refinance your mortgage depends on a few different variables, and really should start with your goals and how the home mortgage fits in those goals. Once you’ve identified those, and taken a look at the costs and benefits afforded you with a refi, you should have a better idea of whether refinancing now is right for you.
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