Is it time for you to refinance your home? The thought may have entered your mind recently, and now you are constantly pondering it. Of course, a potentially better deal is out there, but is it worth chasing?
Refinancing your mortgage is not a decision you can make on a whim. There are several factors you must consider before pushing forward with the move.
Take this opportunity to learn more about mortgage refinancing. Understand why people refinance and how to recognize the right time to do it. We will also discuss the process of refinancing so you can get started on that if you so desire.
Why Should You Consider Refinancing Your Mortgage?
Before we discuss how to identify the right time for refinancing, we should first talk about why people consider this move in the first place. You already have a mortgage, so why should you bother changing it?
Listed below are some of the reasons why refinancing could make sense for you.
You Want a Shorter Term on Your Mortgage
First, you may want to refinance because it can shorten the term of your mortgage.
When you first bought your home, you knew money would be tight early, so you went for a 30-year mortgage with an interest rate higher than what you originally wanted. However, agreeing to those details of the deal meant you owed relatively low monthly payments, thus making the trade-off worth it. At the time, you had no other options.
Now that you have greater financial stability, a shorter loan with a lower interest rate and a higher monthly obligation may be a more realistic option for you.
Shortening the term of your mortgage can save you money and give you significant financial flexibility. In addition, you can start working on your plans earlier because your refinanced mortgage will become a non-issue sooner.
You Want a Lower Rate for Your Mortgage
Interest rates are falling, and you want to take advantage of that. You are already on the phone discussing refinancing to ensure you do not miss out on this opportunity.
Securing a lower interest rate for your refinanced mortgage can help you save money, but that does not happen automatically. You still need to consider how the other aspects of the deal may affect your finances to determine if you will come out ahead.
Ask a real estate attorney to examine your new mortgage. After their review, they can tell you if the new mortgage will generate the savings you desire.
You Want to Change How Your Mortgage Works
Homeowners have the option of getting either an adjustable-rate mortgage (ARM) or one with a fixed rate.
Having an adjustable-rate mortgage is advantageous if rates are going down in your area. Due to the friendly interest rate environment, you may end up owing less on your Rhode Island home.
Then again, interest rates could rise in your area, and you will be at their mercy. A fixed-rate mortgage will keep you protected if something like that happens.
You Want to Cash Out Some of Your Home Equity
Lastly, some homeowners will refinance as a way to secure money. They will cash out some of their home equity to obtain the money they can use to cover certain expenses.
Refinancing, for this reason, can be risky, but it may be your only option if you are severely hurting in the financial department.
When to Refinance Your Home: The Important Factors to Consider
You have finally decided that refinancing is the right move for you. Now that you have reached that conclusion, you must determine when to make that move.
Timing your refinancing will be critical. If you pounce too early or wait too long, you may miss your desired benefits.
So, how can you tell if the time is right for you to refinance your home? The factors detailed below should help you make the right decision.
The Potential Decrease in Your Interest Rate
In many cases, refinancing will only be worth it if you can lock down a substantial decrease in your interest rate.
Not too long ago, experts in the real estate market suggested that refinancing would only be worth it if you could lower your interest rate by at least two percentage points. Unfortunately, these days, you will have a hard time finding a loan similar to yours that offers such a substantial decrease.
It is more realistic to aim for a rate decrease that hovers around 1%. If you have quite a sizable loan, shaving the interest by even half a percent could lead to substantial savings.
Those are the thresholds you should aim for if you are considering refinancing. A less substantial decrease may not be worth it especially given the additional expenses that come with refinancing your mortgage.
Monitor mortgage rate trends in Rhode Island by using this handy resource provided by Zillow. Closely watch it for trends so you can identify the best time for you to refinance.
The Current Status of Your Adjustable Rate Mortgage
Keeping an eye on mortgage rates in your area is also a must if you have an adjustable-rate mortgage.
Your mortgage rate may have steadily increased over the past few months. Unfortunately, there may also be no indicators that it will stop climbing anytime soon.
Those climbing interest rates can put you in a tough spot. The money you set aside for home repairs or other important matters may now need to be used for your mortgage.
In that scenario, refinancing your mortgage can give you much-needed stability. In addition, you can stop worrying about the extra money you will pay because the real estate market has been especially volatile lately.
Even without the threat of spiking interest rates, some homeowners may prefer switching to a fixed-rate mortgage, so they have a clear idea of what they need to pay monthly. Of course, they may not be maximizing their potential savings in that scenario, but they are getting peace of mind.
Your Monthly Income
Refinancing your mortgage may have been your plan from the start. When you agreed to your original mortgage, you were still relatively new at your company and making a modest salary. However, after putting good work in, you have received promotions a few times and now take home fairly substantial pay.
Once you secure that side of the equation, you can start working on refinancing. Grab that shorter term with the larger monthly commitments now that you can afford it.
Your Current Credit Score
Next, we need to talk about the role your credit score should play in your decision to refinance.
Your credit score gives lenders an indicator of how well you handle your debt. Higher credit scores are more appealing to lenders. They are more likely to give you a loan if you have a high credit score.
The FICO credit score is most often referenced by businesses in the United States. According to Experian, an individual’s credit score may fall into one of five ranges.
Credit scores in the 300 to 579 range are poor, and the fair range extends from 580-669. Your credit score is good if it goes from 670-739 and extremely good if it ranges from 740-799. A credit score somewhere in the range of 800 to 850 is considered exceptional.
As a homeowner considering refinancing, you need to know your credit score for two reasons.
First, a lender may not offer you the option to refinance unless your credit score is 620 or better. Work on raising your credit score first before you start worrying about refinancing.
The other reason is related to maximizing your savings. Since you are going through the trouble of refinancing, you probably want the lowest interest rate available. Securing that low-interest rate may only be possible if you have a high credit score. Only refinance when you have a credit score above 740 to get the best rate possible.
Your Current Debt-to-Income Ratio
You should also take a moment to evaluate your debt-to-income ratio before going through the refinancing process.
For those unfamiliar with the term, the debt-to-income ratio shows what percentage of your monthly pre-tax income you use for settling your outstanding debts. The debts could include car payments, credit card bills, mortgages, and other regular expenses.
You want your debt-to-income ratio to be low, which will help you secure a refinanced mortgage.
Generally speaking, the maximum debt-to-income ratio most lenders accept is around 43%.
Of course, you cannot expect to get a great deal if your debt-to-income ratio is that high. If you want the best interest rate for your new mortgage, you should approach a lender when your debt-to-income ratio has lowered to 28%.
Your Current Level of Home Equity
Are you refinancing your mortgage to cash out? Before doing that, you should check your current home equity level.
Before considering refinancing, you will need at least 20% equity in your home. If your home equity is not up to that level, lenders may hesitate to back you.
Building home equity is important not only because it opens up the option of refinancing. Homeowners who are refinancing to cash out must also build equity so they can secure more money upfront.
Homeowners can accumulate home equity by simply waiting. Making home improvements and paying the existing mortgage faster can also help increase equity.
Your Desire to Stay in Your Rhode Island Home
Lastly, you should only consider refinancing if you plan to stay in your Rhode Island home long-term.
Getting a new mortgage and selling your home a few months later can lead to painful prepayment penalties. Those payments may even be more painful precisely because of the terms outlined in your new mortgage.
Refinancing your mortgage only makes sense if you plan to stay in your current home long-term.
How to Refinance Your Existing Mortgage
The process of refinancing your home is quite similar to securing your mortgage the first time around. Still, there are enough differences that it is worth going over the steps again.
Step 1: Identify Your Ideal Mortgage
Assuming you have already considered all the factors we discussed in the previous section; you can start refinancing your mortgage by identifying the type of loan you want.
Do you want to switch to a fixed loan, or are you more focused on finding the lowest rate available? List down the characteristics of your ideal loan so you can properly convey what you want to your potential lenders.
Step 2: Talk to Multiple Lenders
Now that you have a clear idea of what loan you want to get, you can start talking to multiple lenders. Talk to your current lender and any other bank or agency that can present you with your desired loan. Make sure you talk to all the lenders in your area before you proceed further.
Step 3: Lock in Your New Interest Rate
Do you like a particular loan offer and the lender’s interest rate? If so, you should strongly consider locking that rate in.
The current rate may already be enough to ensure that you can break even quickly. However, it may also represent a significant decrease, so you can start piling up the savings sooner rather than later.
Lock that rate in and move to the next step.
Step 4: Prepare for a Home Appraisal
Lenders will not give you the money unless they thoroughly check your property. They will likely request an appraisal to generate a more accurate valuation of your Rhode Island home.
Clean up and stage your home to showcase its best qualities. Do what you can to make the results of the home appraisal more favorable to you.
Step 5: Take Out Your Refinanced Loan
With the appraisal done, all that is left is to secure your new mortgage. Complete the paperwork, submit it to your lender, and your new mortgage should be approved.
Refinancing is not the right option for everyone. If refinancing is not an option for you, consider selling your home instead. We at the RI Home Store can help with that sale. Reach out to us today and make the process of selling your home significantly easier!