Taking Advantage of Current Interest Rates by Refinancing

Throughout 2018, most talk of interest rates for 2019 was focused on projections that they would increase. Industry experts warned consumers that the rates would quickly surpass the 5.0% mark. And for a brief time at the end of 2018, this seemed to be the case. However, we suddenly saw the rates drop back down, at times even below 4.0% (on a 30-year fixed rate mortgage). For many, this can mean it’s the perfect time to buy a new home. For anyone else who has already purchased a home at a higher rate—perhaps something closer to that 5.0% mark—this is a great time to look at refinancing.

What is Refinancing?

When we talk about refinancing a mortgage, we are essentially replacing your old mortgage with a new one at a lower interest rate. This is a great option for several scenarios:

• Securing a better interest rate
• Converting a variable rate mortgage to a fixed rate mortgage
• Freeing up equity in your home for renovation projects

We will be focusing on the first point, but it is important to note that refinancing is a viable option for several scenarios. If you have questions whether any of these situations apply to you, we encourage you to contact us so we can discuss your options further.

What Difference Does the Rate Make?

How much of a difference does one percentage point really make? It may seem insignificant, but when examining the total purchase price of homes, and the fact that payments are stretched out over 30 years, the numbers add up.

As an example, let’s look at a $250,000 mortgage. At an interest rate of 5%, your monthly payment (including estimated property taxes) is $1842.05. That same amount financed at 4% drops your monthly payment to $1693.54. That’s a savings of $148.51 per month. Nice, but not huge. But let’s look at what that looks like over the course of 30 years, or 360 months. That $148.51 savings per month just became $53,463.60. Now that’s substantial.

Before You Refinance

Now that you’re excited at the potential savings you can get by refinancing, the next step is to make sure you are ready to move forward. Just like when you first applied for that mortgage, you want to take several steps to ensure you are in the best possible position to qualify for a better interest rate.

1. Credit Score: Verify your scores are still excellent before applying for a refinance. Just like with the mortgage application, your lender will need to run a credit check to qualify you for a refinance loan. The better your score, the better your rates.
2. Closing Costs: Again, just like that initial mortgage, refinances usually come with closing costs (though at times lenders can offer reduced or zero closing cost options, so always ask). Be prepared with the necessary cash on hand so you are not surprised at the closing.
3. Financial Records: Be prepared to submit recent bank statements and proof of income as part of the refinance process
4. Know Your Home’s Value: Another factor in the refinance process is the amount of equity you have in your home. Depending on the size of your initial down payment, or changes in property values in your immediate area, you could have substantial equity built up. This is important because having at least 20% equity will mean you qualify for better rates. While refinancing is possible with less than 20% equity, your rate will be higher than if you meet at least that 20% criterion.

The Next Step

Everything we have mentioned to this point is a high-level overview. Specifics can vary, so we always recommend talking with a loan officer to see what we can offer you based on your specific situation. Factors like the total value of your home, whether you have a VA or FHA loan, and the amount of equity you currently have all play a role in determining how good of an interest rate we can offer you. When you are ready to pursue your options, call us to set up a time to talk.