Mortgage rates are hovering near historically low rates, so it should come as no surprise that we’re expecting another small refinance boom.
While there’s nothing that we love more than helping people find their next home (we are Realtors, after all!), we also understand that it often makes sense to stay put in your current home. Here’s what you need to know if you’re thinking about refinancing and taking advantage of these low rates:
1. Aim to shorten your loan term, if possible. The most popular loan choice among people refinancing is the 15-year fixed rate, which currently stands well under 3%. While your monthly payment may increase a bit depending on the amount of equity you currently have in your home, you will save thousands on interest by switching to the 15-year payment plan. Unless your financial situation requires it, try to avoid refinancing for another 30-year mortgage – we know it’s tempting because it can drastically reduce your monthly payment, but it will cost you far more in the long run (don’t forget that interest is front-end loaded, meaning that you’ll revert to paying almost entirely interest each month).
2. Shop around, and keep the “big picture” price tag in mind. Some lenders will advertise ultra-low rates in bright flashing lights, but be careful of what that may entail. It could require you to purchase points (an upfront fee in exchange for a reduced interest rate) or result in far more additional fees. Instead, ask your loan officer for a detailed breakdown of all the fees, interest rate, and estimated monthly payment.
3. Not every homeowner is eligible. Unfortunately, some homeowners will find that they’re not eligible for refinancing their homes for a number of reasons. One of the biggest hurdles is having enough equity in your home (most lenders require at least 5%, although some require far more). This is especially a concern for buyers who purchased their homes around 2006 or 2007 when prices were high, as they may still owe more than what their home is worth. Another potential barrier is a lower credit score or poor debt-to-income ratio, as the banks will be scrutinizing your financial situation as if you were purchasing another home. Alternatively, if your credit score improved significantly, you may be eligible for a much lower rate due to that alone!