Determining the Right Time to Refinance

If you’re a homeowner, you may have noticed that mortgage interest rates plummeted to record lows in 2020. Many homeowners took advantage of this historic dip to refinance, leaving some perhaps to worry they have missed their chance. While it’s true that interest rates have recently been creeping back up, it’s still possible to save money on a refinance. Every homeowner should know that there are multiple factors to consider when deciding on a refinance home loan. Here we break down some common considerations to help you identify the right time for your refi. 

Interest Rates

One very common reason homeowners choose to refinance is lower interest rates. 

According to Freddie Mac, 2020’s 30-year fixed mortgage rates averaged at 3.11%, dipping to an unbelievable 2.68% in December. That’s a record-breaking low over the past 50 years. While 2020 is behind us, average interest rates are still incredibly low, historically speaking, with June 2021’s rate clocking in at 2.98%.

However, it’s important to know that the interest rate you’re offered might not line up exactly with the average rate. Your rate will be determined based on the lender and a variety of qualifying factors. As always, comparing the rates from multiple lenders will help you find the best rate. 

Loan Duration 

Another factor to consider for a refinance is how long you’ve had your existing loan. The longer you’ve had the loan, the closer you are to paying off your loan, the less likely you may be to want to lock in a new loan. If, however, you still have lots of time left on your loan, refinancing might be a wise decision. 

Determine how many years you have left on your current loan to decide whether it makes sense to refinance with a shorter-term loan. If you’ve already shaved off a decent amount of your principle on your current loan, then you’ll be taking out less money than your original loan and potentially eligible for lower interest rate, which could equate to lower monthly payments.

Much of this decision will depend on how long you want to own your home – if moving is in your short-term plan, you may want to hold off since you’ll need to get a new loan on your next home anyway.

Refinancing to a Different Mortgage Type

Perhaps when you took out your current loan, it made financial sense to choose an Adjustable Rate Mortgage (ARM) and now you’d like to refinance to lock in a fixed rate. For instance, if your original plan was to sell your home after a short period of time, yet now your situation has changed and you’re planning on a staying longer, refinancing from an AMR to a fixed-rate loan might make sense. Alternatively, you could want to switch from a fixed-rate loan to an ARM if you’ll be staying in your home for less time than you’d initially anticipated, and are eligible for a much better rate under and ARM.

If you’re hoping to do renovations on your home or pay off debt, you could consider switching to a cash-out refinance. Cash-out refinancing allows you to take out a new home loan and use part of your home’s equity (usually up to 80%) to receive additional cash. Just be sure you understand the risk of foreclosure before sealing the deal.

Other considerations

Just like when you took out your current home loan, lenders will be reviewing your credit score and debt-to-income (DTI) ratio if you plan to refinance. If either of these numbers have improved since you acquired your current home loan, it could mean a lower rate for you. Overall, your financial stability will be a huge qualifying factor in securing a lower mortgage rate.

Though closing costs can vary by lender, they can clock in at anywhere between 2% and 6% of the loan amount. Make sure you’re factoring that expense into your budget as well.

Is Now the Right Time to Refinance My Home Loan?

Deciding whether to refinance your loan is specific to everyone’s individual circumstances. It ultimately comes down to assessing your future, doing the math, and getting quotes from lenders to determine whether you stand to save money. 

At Directors, we understand that you need a competent lender who can walk you through every step in determining whether it’s worth the effort to refinance. We understand that refinancing can feel daunting, but we’ll work hard to ensure you’re getting the best rates without the hassle of paperwork or unnecessary stress.

If you’re just getting started, we recommend using our Refinance Calculator to get a general idea of the amount of money you could save by refinancing. When you’re ready for a more detailed quote, our team is ready to help! Learn more at directorsmortgage.com/mortgage-refinance-calculator.