Interest Rates Are At Historic Lows (Again); Time to Refi?
Well, here we go again. Interest rates are back at near zero. After the housing crisis in 2008, interest rates fell significantly. The recovery was long and it was only recently in 2017 when they began to creep up again, but nowhere near pre-2008 levels. Now we find ourselves in the midst of a global pandemic that has again turned the Fed’s attention to keeping the economy afloat.
Perhaps you are now wondering whether you should refinance your home? Mortgage rates have certainly benefited buyers in recent times. This is contrary to the 1980’s when rates averaged 15%. Some credit cards don’t even have rates that high! But, those days are long gone. If you find yourself wondering whether or not to refinance, here are some questions to ask yourself:
1. What am I trying to accomplish?
There are multiple benefits to refinancing. These can include a lower rate, shorter term, or a smaller payment. You may be able to accomplish all 3, but more than likely, you can benefit significantly from 2. Lowering your rate and your payment typically go hand in hand. However, if you cannot lower your rate by at least 1%, you may not benefit as much. But, be aware that lowering your rate may also eliminate your mortgage interest deduction. Shortening your term can save thousands in interest over the life of your loan, but a new (higher) payment could also put a strain on your budget. A smaller payment may give you much needed cash flow to pay down debt or save towards other goals. Whatever your reason, ensure you have 1, preferably 2 goals in mind.
2. Am I planning to move in the near future (and when is my “breakeven”)?
Refinancing always involves closing costs (even in a “no cost” refinance). A no cost refinance means you will pay a higher interest rate (hint: the costs are built back into the loan). Closing costs on a refinance average 3 to 6% of the loan amount. You can pay these out of pocket or roll them back into the loan (but not always). If you do not plan to stay in the home to at least “breakeven” from the costs, it is probably not worth it. Also please remember, these costs can be negotiated, so shop around!
3. How is my financial situation?
This is a big one! For example, most lenders are not going to give you a new loan at a super low rate without a great credit score, stable employment history, and debt that equals 36% or less of your income. The key is to prepare before shopping around. Know your credit history. Many credit cards provide your FICO score for free. Pull your credit reports (also free once per year at www.annualcreditreport.com) and dispute any inaccurate information. How is your cash flow? Can you pay down some debt? Can you (do you want to) pay for some closing costs out of pocket?
4. What is my home’s value?
Private Mortgage Insurance (PMI) is required (unless it is VA) if you have less than 20% equity in your home. If you are trying to eliminate PMI, find out how much your home is worth. You can, of course, check on sites such as Zillow and Redfin. This will give you an idea, but not all lenders will appraise your home the same. It will also be easier to qualify with conventional lenders if you have at least 20% equity.
The keys to a successful refinance are to prepare, shop around, and ensure you know why you are refinancing in the first place. We are in a great interest rate environment if you are in the market for a loan. Ensuring you know your situation well and if you are planning to keep your property for a while, now may be the perfect time to take advantage of some historically low rates. Good luck!