With all the chatter about interest rates dropping in 2024 those of us (yes, I say *us* because I currently have a higher interest rate on one of my properties!) who purchased in the last year may be looking to refinance into a lower interest rate to save on our monthly mortgage payment.
If you're not even sure what refinancing is don't worry! Before purchasing my first home I remember hearing a friend talk about their refinance and thinking it was fake, the concept was so foreign to me that you could just save hundreds of dollars a month on your mortgage payment?? Refinancing refers to paying off your current mortgage loan with a NEW mortgage loan, which allows you to adjust the terms of the loan – like interest rate, length of loan, loan amount, etc.
Adjusting these terms can lower your monthly payment, and while there is an initial cost to refinance (you will have closing costs) over the length of your loan it may pay for itself by dramatically lowering your monthly payment. Which for me, as a buy and hold investor, and for homeowners planning to stay in their current home for the foreseeable future is a huge win.
While refinancing can be financially advantageous the decision is a significant move that warrants careful consideration. Read below for opportunities and factors to consider when weighing the costs and benefits to refinancing your mortgage loan.
Interest Rates Have Dropped
As discussed, the higher rates from 2023 (peaking at 8.45%) are making refinancing a very attractive option as rates have dipped slightly to an average of around 7.25% the past few weeks. If the current rate is significantly lower than your interest rate (and just 1% drop can have significant impact!) refinancing can be a smart move resulting in substantial savings over the life of your loan.
Improvement in Credit Score
Although recent changes in lending regulations have lessened the advantage of a higher credit score when it comes to qualifying for a better interest rate, there's still a notable benefit to be gained from an improved credit score. Combining a lowered interest rate with an increased credit score can help secure a significantly lower monthly mortgage payment.
Adjustable-Rate Mortgage
If you currently have an adjustable-rate mortgage that keeps you up at night wondering how high the rate may climb one day, when interest rates are lower it may be a good time to refinance into a more secure fixed-rate mortgage.
Build or Access Equity
Refinancing can be an avenue to access the equity in your home or build more equity. Cash-out refinancing allows homeowners to tap into their homes equity by borrowing more than what they owe and receiving the difference in cash (a favorite strategy of investors! They then use that capital to purchase more properties). Or you may want to refinance into a shorter loan term to help build equity faster and pay less interest overall.
Eliminate Private Mortgage Insurance (PMI)
One key distinction to make here: you DO NOT need to refinance to remove your PMI from your loan (unless it is an FHA loan) all you need is an appraisal that shows the bank you currently have 80% LTV. But if you currently are paying PMI and have a higher interest rate you can both lower your rate AND remove your PMI all at once with a refinance. Huge savings on your monthly payment.
Overall Costs and Savings
Refinancing is not free, there will be closing costs (typically 2-6% of your loan amount) associated with your new loan and depending on the current interest rate you may want to buy down points to secure an even lower interest rate and monthly payment. Calculate the potential savings over the life of the loan to ensure that refinancing benefits outweigh the costs.
Timeline to Move
Consider how long you plan to stay in your current home. If you intend to move within a few years, the cost of refinancing might outweigh the potential savings. On the other hand, if you plan to stay for an extended period, the cost to refinance may pay for itself in a few months/years through savings on your mortgage payment.
Consultation and Comparison
Seek advice from mortgage professionals and compare offers from multiple lenders. Understanding the different loan options and their associated terms and fees will help you make an informed decision.
Refinancing your home can be a powerful financial tool if timed correctly and aligned with your objectives. However, it's not a one-size-fits-all solution. Evaluating current interest rates, your financial situation, and long-term housing plan (or investment goals!) is crucial. Take the time to weigh the pros and cons before deciding if refinancing is the right move for you.
As always, if you're in the Minnesota market, reach out anytime for a list of my preferred lenders that will walk you through all your options in detail and the pros/cons for your specific situation.
xx,
Claire
