If you are wondering whether this is a good time to refinance your home, we believe the short answer is “yes!” However, the underlying reasons why are a bit more complicated.
During 2018, the Fed raised interest rates four times, and those moves were no friend to the American economy or real estate market. After some brow-beating by the current administration, the Fed has at least temporarily backed off its plan to hike rates again in the near future. That interest rate environment would seem to indicate there’s no rush to refinance your house. Not so fast.
Although the Fed yielded to political pressure, temporarily, a grand plan is in place to raise interest rates above the historic lows following the financial crisis. Despite the splashy click-bait headlines circulating the internet, it’s unlikely the Fed will retreat back to the near-zero interest rates enjoyed during the early years of the recovery.
It’s only a matter of time before rates uptick, and homeowners are put in a less enviable position to refinance your home. So, yes, it’s an excellent time to refinance your home as long as you avoid some common missteps.
1: Not Maximizing Your Credit Score
The era when cash was king seems to be a thing of the past. Today’s economy tends to be far more credit driven, and lending institutions are more than happy to offer products to people with reasonably sound credit histories. In terms of getting the best possible rate to refinance your home, high credit scores rank among the most valuable assets you can possess.
Believe it or not, the difference between a single credit score point over the life of a mortgage can add up to as much as $1,000 for every $100,000 you borrow. That may not seem significant until you do the math on 10 or 20 points. Now we’re talking a new deck, car or tropical vacation. Putting improved credit scores in that perspective, it’s clearly worth taking some time and making an effort to improve your scores as much as possible before refinancing.
It’s not uncommon for people to have errors on their credit reports. A bill that got paid and didn’t come off your report or incorrect reporting from government agencies about payments such as child support can negatively impact your rating when they should not. According to reports, upwards of 20 percent of all credit reports have faulty information and five percent can result in higher mortgage rates than borrowers may be entitled.
2: Underestimating Property Values
Data from resources such as Fannie Mae indicate that a significant number of homeowners do not understand the full growth of their property’s value since the subprime mortgage crisis and financial collapse. Lenders generally prefer homeowners to enjoy 20 percent or more in equity when you refinance your home, and you may have more than you think.
According to resources such as the U.S. Bureau of Labor Statistics, home values have substantially rebounded. The average uptick in home value from 2000 to 2019 stands at more than $55,000. That figure may be a lot higher than many homeowners anticipate when considering whether to refinance your home.
The inherent problem with not having an accurate estimate of your home’s worth is that you could be squandering an opportunity for a beneficial rate right now. This may be particularly true if you were required to secure mortgage insurance or PMI when you originally purchased the property. Improved home equity could negate that factor when you refinance your home. Knowing the actual value of your home allows you to make informed decisions. Find out what your home is worth.
3: Not Shopping Around When You Refinance Your Home
Reconnecting with your existing lender and moving forward may seem like an efficient way to refinance your home. After all, the lender may already have much of the pertinent information needed for the transaction, and you’ve already done business with them in the past. However, the real estate and mortgage underwriting climate has dramatically changed in recent years.
Today’s mortgage applications are often submitted electronically, and rates can differ considerably as upstart and traditional lenders compete. It is also no secret that changes in regulations have allowed banks and other mortgage outfits to write more loans. As someone who already owns a home, you enjoy a unique negotiating position.
Consider for a moment that the difference between a $250,000, 30-year fixed, 4.25-percent mortgage and one at 4.0 percent can save you upwards of $13,000 in interest payouts. Remember, you are an established homeowner. It’s time for financial institutions to make you their best offer. Shop around.
4: Not Managing Closing Costs and Fees
There seem to be two common errors that people make regarding costs and fees when refinancing. The first issue is that too many people forget to calculate closing costs into the financial equation. Although you can save a substantial amount of money when you refinance your home, it’s essential to be prepared to pay the closing costs.
In some cases, homeowners roll those costs into the new mortgage, and that can save the upfront expense. However, keep in mind that you pay interest on closing costs and fees under this scenario. If you are in a position to pay out-of-pocket, you can gain considerable savings over the life of the loan.
The other common mistake is that borrowers overlook the possibility that some fees are negotiable. Things like title and escrow may enjoy some flexibility, depending on state law. We are in the midst of a very competitive economy and housing market. Assume every inch of your home refinance is open to re-negotiating.
5: Waiting for Lower Interest Rates
As mentioned above, there are plenty of splashy headlines claiming that interest rates are going down. Of course, there were just as many last year that said they would increase. The reality of interest rate speculation is that it’s just prognostication by so-called experts. If you are in a position to refinance your home and save money, today’s lending landscape is what matters.
Homeownership is not just personal, it’s also business. That’s why it’s essential to remain grounded in the business realities that exist right now. Hedging your bets on lower rates could result in you losing tens of thousands over a quarter or half of a percentage point. If you can take advantage of current mortgage rates, pull the trigger and take the win.
This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only.
Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.