When you should refinance is a big question on the minds of many homeowners now that rates have started to move downward. How do you know when is the right time for you to start the paperwork? Should you wait a few months or start the process now? With the current talk about interest rates dropping refinancing a mortgage can be a smart financial move, but the timing and circumstances need to be right. Here’s a breakdown of the best time to refinance, things to consider, and how your home equity impacts the process:
When You Should Refinance Depends….
- Lower Interest Rates: If mortgage rates have dropped significantly since you took out your loan, refinancing could help lower your monthly payments and overall interest costs.
- Improved Credit Score: If your credit score has improved since you first took out your mortgage, you may qualify for better rates, making refinancing worthwhile.
- Change in Loan Terms: You might want to shorten your loan term (e.g., from a 30-year to a 15-year mortgage) to pay off your home faster or extend the term to lower monthly payments.
- End of ARM Introductory Period: If you have an adjustable-rate mortgage (ARM) and the low introductory rate is about to expire, refinancing to a fixed-rate mortgage can offer more stability.
- Equity Growth: If you’ve built substantial equity in your home, you might be able to refinance to get rid of private mortgage insurance (PMI) or take cash out for home improvements or other expenses.
Things to Consider When You Think of Refinancing
- Closing Costs: Refinancing isn’t free. You’ll need to pay closing costs, which typically range from 2% to 5% of the loan amount. Ensure the long-term savings from refinancing outweigh these costs.
- Break-even Point: This is the time it will take for the savings from lower payments to cover the closing costs. If you plan to stay in your home longer than this period, refinancing might make sense.
- Loan Term Reset: Refinancing could reset your mortgage term. For example, if you’re five years into a 30-year mortgage and refinance into another 30-year loan, you’re extending the time you’ll be paying.
- Current vs. Future Rates: Consider where mortgage rates are now and where they may be heading. Timing your refinance to lock in a low rate is crucial.
- Impact on Credit: Refinancing will result in a hard inquiry on your credit report, which could temporarily lower your credit score.
How Your Increased Equity Affects Your Refinancing
- Loan-to-Value Ratio (LTV): Lenders look at how much equity you have compared to your home’s current market value, called the LTV ratio. The more equity you have, the better the loan terms you can get. Typically, an 80% LTV or lower will get you the best rates, as it shows the lender that the loan is less risky.
- Private Mortgage Insurance (PMI): If you’ve paid down enough of your mortgage and have more than 20% equity, you may be able to refinance and eliminate PMI, which will lower your monthly payments.
- Cash-out Refinancing: If you have significant equity, you may choose a cash-out refinance, which allows you to borrow against your home’s value. This can be useful for funding major expenses like home renovations, paying off high-interest debt, or investing in other financial opportunities. However, this increases your mortgage balance and monthly payments.
Refinancing at the right time, with careful consideration of costs and benefits, can help you take full advantage of your home’s equity and financial situation.
Do You Want to Talk to a Lender?
When you should refinance your home in Bethesda MD or Washington DC or anywhere else in the DMV depends on so many different factors such as the difference between your current interest rate and the newest rates, your credit score and how much equity you have in your home. If you are thinking about refinancing to take advantage of the new rates (or the ones that should be coming soon) you should definitely talk to several lenders. I am happy to provide you with several lenders from a variety of banks and mortgage companies. Let’s talk at 240-401-5577 or email me at lise@lisehowe.com!
