Mortgage rates dropped to just above 6% in late September, drawing homebuyers from the sidelines and fueling the biggest refinancing boom in recent years. Although rates have since jumped up, they remain lower than the peak levels of October 2023, when they almost hit 8%.
“Proper Rate closed about 10 times more refinancing deals this past fall than we closed throughout 2023,” said Kyle Gillespie, SVP of mortgage lending at Proper Rate.
If you’re considering refinancing your mortgage to take advantage of the lower rate environment, read on for several essential tips.
Calculate Your Home’s Equity
Before you begin the refinancing process, you’ll want to make an estimate of the equity in your home. For most lenders to consider refinancing your home, you’ll need at least 5% – although most lenders recommend having at least 20%.
If you lack sufficient equity, focus on paying down your mortgage or wait for property values to rise. Increasing your equity not only improves refinancing eligibility but also typically results in better loan terms and lower interest rates.
Determine Your Goal for Refinancing
Before you start the refinancing process, clarify your goals. Are you hoping to reduce your monthly mortgage payment? Maybe you’re interested in a shorter pay-off term, i.e. going from a 30-year term to 15 years, or you’ve built up enough equity that you can eliminate your private mortgage insurance (PMI) or cash out the equity for other uses.
Whatever they may be, determining your reason(s) for refinancing before diving into the process with your lender will help you decide which loan is best for you.
Understand the Different Types of Refinances
There are several types of refinancing options to consider, each suited for different needs. According to Gillespie, rate-and-term refinancing is the most common, allowing you to adjust your interest rate, loan term, or both.
Cash-out refinancing is another common type of refinance, which lets borrowers take out a new mortgage for more than they currently owe and pocket the difference. However, it’s crucial to look at your budget to ensure you can handle the increased debt load before making any decisions. And you need to have enough equity in your home to borrow more money. According to Gillespie, a borrower will typically need a loan-to-value (LTV) ratio of 80% after a cash-out refinance. Your LTV can be calculated by dividing your loan amount by your home’s appraised value.
Keep in Mind the Total Cost of Refinancing
Refinancing isn’t free. You’ll encounter several expenses along the way, including lender, appraisal and title fees. In some states, you’ll also need to pay for an attorney to review and file the paperwork for you. Remember to ask your lender for a detailed estimate of all fees involved, allowing you to budget accordingly.
Find Your Break-Even Point
Determining your break-even point is crucial when refinancing. This calculation helps you understand how long it will take to recoup the costs of refinancing through monthly savings. For instance, if you save $200 per month and refinancing costs total $2,000, it will take ten months to break even.
“Buyers should consider their plans for the future when making their calculations. If they plan to stay in the home for several years, refinancing is likely worthwhile. Conversely, if they anticipate moving soon, the costs might not justify the savings,” said Gillespie.
Bottom Line
With careful planning and research, refinancing can be a valuable tool in achieving your long-term financial goals. If you have any questions, ask us to put you in touch with a trusted loan officer.
