Today's mortgage environment is truly unprecedented. Despite 2018 predictions anticipating at least two rate hikes in the following year, homebuyers and lenders were pleasantly surprised when the Federal Reserve announced no rate increases for 2019. The rates have since sunk to historical lows, the lowest in over half a century, prompting homeowners to explore refinancing options to save on their mortgage payments. Indeed, despite the persisting pandemic, refinancing activities have soared by 107% compared to the previous year.
What is Refinancing and Why Should You Consider It?
Mortgage refinancing involves repaying an existing loan with the proceeds from a new loan, using the same property as collateral. This process is typically undertaken to secure more favorable loan conditions such as lower interest rates or reduced monthly payments. The following are some reasons why refinancing might be suitable for you:
- Changes in your financial status necessitating a reduced monthly mortgage payment.
- Alterations in your marital status.
- The desire to leverage your home's equity for other significant expenses.
There are no explicit rules about the timing of refinancing. However, your ability to secure a new home loan is contingent upon your current financial status and the requirements of the lender. Certain lenders may not refinance a loan issued within the previous 120-180 days, hence it's advisable to consult with your current lender for specifics. Remember, the pertinent question isn't whether you can refinance, but whether you should. The traditional benchmark for beneficial refinancing is a rate reduction of at least 2%. However, some lenders, like CrossCountry Mortgage, assert that even a 1% savings is a compelling reason to consider refinancing, especially in this low-rate climate.
Is Refinancing the Right Move for You?
While refinancing often presents more pros than cons, those who have only recently secured a mortgage might encounter additional expenses that could offset the benefits of a lower interest rate. It's crucial to remember the additional costs associated with a home loan process, including closing costs, which also apply to refinancing. These costs typically range from 3-6% of your loan amount and averaged $4,876 per transaction in 2017, according to ClosingCorp. Thorough preparation is necessary to ensure that these fees don't outweigh your savings from refinancing.
Another aspect of the refinancing process is a potential reevaluation of your property, even if it has only been a few months since the last appraisal. Most lenders require at least 5-10% equity in your home unless opting for a cash-out refinance, which may demand more. High loan-to-value ratios and little equity may still secure loan approval, albeit at significantly higher interest rates.
Lastly, you should be aware of prepayment penalties, fees imposed by some lenders when borrowers repay their loan ahead of schedule, though these are increasingly rare.
The Advantages of Refinancing
Despite these considerations, refinancing can offer several benefits:
- Lower interest rate
- Accelerated debt clearance (switching from a 30-year to a 15-year mortgage)
- Quicker equity building (with a shorter loan)
If you're mulling over the idea of refinancing your existing loan and require more information, don't hesitate to reach out to a Mortgage Advisor today! They can provide expert guidance tailored to your circumstances, helping you make the best decision.
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