One of the biggest debates in the mortgage industry revolves around the topic of refinancing. Some economic pundits will tell you that, in order to benefit from a mortgage refinance, you’d have to drop your interest rate significantly — and even then, there are too many pitfalls to doing so. Others say there are numerous economic benefits with refinancing and you should do so right away.
Who, and what, should you believe? Like most things in life, whether a mortgage refinance would be beneficial depends on a number of specific factors. Some of these are:
- Your current mortgage interest rate
- The new interest rate after refinance
- The amount of equity you have in your home
- Your goal(s) in refinancing
- Your credit score and debt-to-income ratio
Because a decision as large as refinancing depends so much on your specific situation, it may be a good financial decision for you while being the wrong choice for someone else. Typically speaking, you will be in a good position to refinance your mortgage if:
- You have a good credit score (especially if it’s better now than it was when you got your original mortgage)
- You have a good debt-to-income ratio
- You have available equity in your home
If all these factors align for you, then now could be a fantastic time for you to refinance your mortgage. Doing so could not only save you a significant amount of money each month and over the life of your loan, but you could also reap the benefits of cashing out some of your equity to use for other things.
Here are two reasons why now may be a great time for you to refinance your mortgage.
1. Interest rates are historically low right now.
Despite a lot of talk late in 2018 that mortgage rates would continue to rise, almost the exact opposite has occurred in 2019. In June 2019, interest rates were approaching the record low from December 2012.
This just goes to show you that it’s hard for anyone to accurately predict what mortgage interest rates will do over time. As such, the most effective way to analyze the benefits of a refinance is to compare today’s interest rate to the rate on your current mortgage.
With industry rates as low as they are, chances are you may be able to reduce your interest rate.
You can use an online mortgage calculator to see how much you could potentially save with a mortgage refinance. All you have to do is plug in the value of your home, the amount you’d be financing through the new mortgage and the interest rate, and you’ll be presented with your estimated monthly payment. You can then compare that to what you’re currently paying.
Because rates are at historic lows, you may also consider refinancing to a 15-year mortgage. It will depend on your unique financial situation, but it may be able to help you cut off a number of years on your total mortgage payments.
2. Home values are still high.
Again, there has been much talk since late 2018 that the housing market throughout the country is slowing, and that home prices will start to plummet.
The first part of that statement has proven to be somewhat true, but the second part has not. According to the Zillow Home Value Index, home values rose 5.2% over the last year, while Zillow expects average prices to “only” increase by 2.2% over the year ahead. While this would validate the slowing market statement, it still shows that average home values are on the rise.
According to the Federal Reserve Bank, the average sales price of houses sold in the United States for the second quarter of 2019 was $378,700. Just five years ago, that number was $340,600 for the second quarter. And 10 years ago, it was $273,400. That represents an 11.17% increase and 38.51% increase, respectively — which equates to a big rise in equity.
Why does this factor make now a potentially good time to refinance your mortgage? Because your home may have increased in value (possibly even substantially) since you first purchased it. And this increase has resulted in available equity, which could benefit you in two ways if you refinance.
First, the equity you have built could make it possible for you to refinance your mortgage from an FHA loan to a Conventional loan, for instance, eliminating the mortgage insurance premium (MIP) in the process. Many people use an FHA loan to finance their home because of the numerous benefits, including a low down payment and lower credit standards to qualify. In exchange, though, they must pay MIP.
If you have built at least 20% equity in your home, you could eliminate this monthly payment by refinancing to a conventional loan. This alone could save you a nice chunk of change each month, which would be on top of the savings you’d realize if you qualify for a lower interest rate.
Second, you could cash out some of the equity in your home to use for other things. One of these options is to pay high-interest debt, such as credit cards or personal loans. Another option would be to use the money to make improvements to your home, which could serve to drive the value of your home up higher.
So, even if home prices are slowing (or even if they drop somewhat), it’s still likely your home has appreciated in value since you purchased it.
When You’re Ready to Refinance, Work with an Expert Mortgage Professional
Despite the back-and-forth debate of whether refinancing a home is a smart move, the fact remains that doing so now could be a great way to save money and build value in your home. If you are in the right situation, there may not be a better time to refinance than today, based on the historically low mortgage rates and the rising value of homes across the country.
If you think a refinance could be good for you, contact the mortgage professionals at Embrace Home Loans. Our experts are well-versed in the vast benefits of refinancing and the many options available for which you could do so. We’ll help you analyze your situation and walk you through every step of the process.
Visit us online or call us today at (888) 907-6261 to learn more.