The Great Recession taught many people that a fast-growing real estate market is a gift and a curse. On one hand, homeowners are ecstatic about their rapid growth in equity.
But on the other hand, it presents a question of whether or not you’re in a housing bubble that could burst at any time. Knowing when to refinance can save you major headaches down the road.
Take a look at this guide to deciding when to refinance your mortgage loan and when to hold off.
When to Refinance Your Mortgage
A mortgage refinance brings opportunity, but only if it’s well-timed. Here are a few questions to ask yourself when considering a mortgage refinance.
What’s My Motivation?
When real estate values go up, it presents an opportunity to cash out on the equity in your home. In stable housing markets, this might prove a decent idea as long as you have the right motivation.
Cashing out the equity in your home isn’t a good idea if you’re looking to use the money for a vacation or shopping spree. The equity technically isn’t your personal cash, but a part of a mortgage loan offered by the bank.
Do I Need Any Renovations?
Only spend the cash out money on expenses you would normally use loans to cover. One example is renovating your home.
Some homeowners can profit from home upgrades but can’t afford to invest in remodeling. Refinancing mortgage loans provides access to capital that can be used to renovate and sell the house at a higher amount later.
Before moving forward with a refinance, think hard about whether this is the best way to secure financing to make household upgrades. If you only need a small portion of your equity to remodel, consider a home equity line of credit instead of a refinance.
Are Interest Rates Low?
One of the best reasons to refinance is to take advantage of low-interest rates. Homeowners who buy property when interest rates are high usually do so with the understanding that they can always refinance at a later time.
Refinancing to a lower interest rate can dramatically lower monthly mortgage payments. Getting a better interest rate also means paying less money to buy your home in the long run.
Be sure to run numbers with your mortgage broker to determine how much you’ll stand to save with a refinance. The number could be much higher or lower than you think after factoring in closing costs.
When to Avoid Refinancing
There are many reasons to postpone refinancing your home. Sometimes a few months can make all the difference when refinancing your home.
Interest rates might drop by several points or a local housing bubble might burst, leading to a drop in home prices. Here are a few warning signs to watch out for before you refinance.
Inflated Housing Costs
If you have any suspicion that local property values could drop anytime soon, don’t refinance. It’s better to wait and see what the local real estate market does before committing yourself to a high mortgage.
Once you replace your mortgage loan with a higher cost loan, there is no reversing the process. You could potentially be stuck with the property if housing prices drop.
Depending on how volatile your market is, lenders might not even approve your property for a refinance.
Interest Rates Aren’t Low Enough
Interest rates need to be significantly lower than your existing rate in order to justify a refinance. This means the current market rate is at least 1 percent lower than what you currently have.
Request an estimate of closing costs to do the math on your potential savings. Combined with a lower monthly payment, is refinancing a good long term strategy?
No Money for Closing
Knowing closing costs and paying closing costs are both very important activities. You do need to be informed about expenses related to refinancing but you also need to be prepared to pay those expenses with ease.
Refinancing requires an underwriting process just like a first mortgage loan. Underwriters look at your cash flow to determine whether or not you’re a high risk borrower.
If you don’t have any cash reserves to cover the cost of the new mortgage, it’s a good idea to wait until it’s financially feasible for you to close on a new loan.
You’re Planning to Move
Sometimes it takes several years for you to earn the money back you spend on a refinance especially if your new loan is higher than your old one. If you’re planning to move soon, you could miss out on these cost savings.
Consider a refinance only if you plan to stay in your home for more than 5 years.
How to Qualify for a Refinance
Refinancing is a much simpler process than applying for a new mortgage loan. But you’ll still need to have your financial house in order to get a lender’s approval.
Lenders want to see that you’ve got a stable income, good credit, and equity in your home. Home values in your neighborhood should be increasing and not declining in order for your property to be considered for a refinance.
Check your credit score before going through the approval process to make sure your score is at least above a 620. Scores above 700 usually give you the most flexibility in choosing a new mortgage loan.
Is Now a Good Time to Refinance?
Knowing when to refinance won’t necessarily prepare you for the process. Regardless of whether you’re thinking of refinancing your home right away, it’s a good idea to start saving money and improving your credit score.
Mortgage refinancing can bring major savings to homeowners willing to wait until the perfect storm to close on a new mortgage loan. For more information or expert help on mortgage refinancing, contact us today.