October 2024 · By: Jess Clegg, Broker of Next Nest Real Estate
As a realtor, sometimes I get asked about the right time to refinance a mortgage and it seems more so now with many recent buyers hopeful to see a decline in interest rates in the coming months. While everyone’s financial situation is unique, when looking to lower one’s monthly payment there are 5 indicators that signal it might be time to consider refinancing.
- Interest Rates Have Dropped: If current interest rates are lower than the rate on your existing mortgage, it might be a good time to refinance. Lower rates can reduce your monthly payments and save you a substantial amount over the life of your loan.
- Eliminating Private Mortgage Insurance (PMI): If your home has appreciated and you now have more than 20% equity, refinancing can help eliminate PMI which can reduce your monthly payments.
- Improved Credit Score: If your credit score has improved since you originally secured your mortgage, refinancing could result in better loan terms. A higher credit score may qualify you for lower interest rates, which can lead to savings.
- Change in Financial Situation: If your financial situation has changed—perhaps you’ve received a salary increase or paid off substantial debt—you might benefit from refinancing. This could allow you to secure a loan with better terms.
- Converting Adjustable to Fixed Rate Loans: If you have an adjustable-rate loan you may consider refinancing to a fixed rate loan (preferably before the adjustable rates start); it can be hard to plan and can become costly with mortgage rates fluctuating.
With the above list some immediate questions probably came to mind, so I’m going to look to local Senior Loan Officer, John Birs of Capital City Financial in Bristol to help answer some of those questions:
- How much lower should current mortgage rates be in comparison to what one currently has before considering to refinance?
“It depends! There are multiple factors that are considered before deciding if a refinance is appropriate. For example, how long do you plan on staying the home? If you are only going to be in the home for a few years, there might not be enough monthly savings to offset the cost to refinance. However, if you plan on being in the home for 30 years, then a ½ point reduction in the rate would be worth refinancing. Everyone’s situation is different so therefore, it is always prudent to get a no cost analysis to see if a refinance is right for you.”
2. What’s a good way to know if I’ve acquired the needed 20% home equity needed to no longer need to pay PMI (Private Mortgage Insurance)?
“Capital City Financial has a tool called the “Home Value Estimator” which utilizes all the comparable sales in the area to determine your Current Home Value. With the recent appreciation in home values over the last 12 months, we are finding that clients who purchased a year ago are now able to drop PMI. Capital City Financial will provide the data from the Home Value Estimator to you at no cost.”
3. By how much should one’s credit improve to make it worth refinancing?
“Again, it depends. Typically, a credit score improvement of 20 points might provide you with a better interest rate and thus make it worth your while to refinance. In addition, with the recent increases in home values, your lower loan to value (Loan amount divided into your home’s value) will most likely improve your opportunity to refinance and save money due to more favorable Loan Level Pricing Adjustments.”
4. Is there a salary increase or a debt decrease amount that should trigger one to consider refinancing?
“Of course, again, it depends. In most cases, a salary increase, or debt decrease will not normally trigger one to consider refinancing. However, if a borrower needed to go thru FHA to obtain their first mortgage financing due to the extended ratios that FHA offers, then if the income were to increase or the debt were to decrease then an FHA would not necessarily be the best loan for the borrower and a refinance may be in cards for them.”
5. What’s the deal with refinancing adjustable-rate mortgages?
“There are lots of reasons to consider refinancing out of an adjustable-rate mortgage:
- Convert to a Fixed Rate Loan, Refinancing can provide stability and predictability in monthly housing payments. This is particularly advantageous if you are concerned about potential rate increases in the future.
- Avoid Payment Shock, which is a sudden large increase in the monthly mortgage payment due to an interest rate adjustment.
- Cash out refinance opportunity, you can now refinance and tap into 90% of your value without PMI.”
Remember, refinancing isn’t for everyone and it’s important to consider the costs involved. Consulting with a mortgage professional like John can provide further clarity and guidance tailored to your specific circumstances.
Do you have a real estate topic that you would like Jess to cover in a forthcoming blog? Send us an email at Info@EastProvHospitality.com and let us know.
