Homeowners rely on the Federal Reserve to do everything in their power to keep interest rates low in the U.S. that can help save thousands of dollars in the lifetime of homeowners’ loans. Homeowners can benefit from dropping interest rates by looking out for the signs to determine whether it’s a good time to refinance their homes.
As mortgage rates are dropping, there are not many options to refinance your home if there isn’t enough equity in the home. New lending standards are impacting the ability of loan officers to pass the loan through underwriting within the time of 100% financing are gone. One of the best options is refinancing your home with a minimum of 20% equity in your home that would leave the loan-to-value rate (LTV) at 80% that is the standard for refinanced and new mortgages.
Another indicator is significant differences in rates with the best option of refinancing a mortgage that is more than 1% difference compared to your current mortgage. For example, if you buy a home through a financed purchase with a 4.5% mortgage and if you refinance at 3.75% it can help you save money but can take years to make up for the closing cost. If you have a 4% mortgage it would make sense to refinance to 3% or lower.
One important part of the refinancing is missed as most homeowners don’t consider the time it will take to pay back the closing costs with a refinanced mortgage, especially with people who plan on living in their homes for a long time. This comes down to the decision of buying the house in the first place and if you aren’t going to live in the home for more than 5 to 10 years, it doesn’t make sense financially to purchase today. If this is the case, it might be a better option to rent because the costs that come with buying a home can wipe out any growth in the value of the home.
Dropping the interest rate is always a good idea but in certain cases can lead to losing a lot of money. For example, if you pay $2,000 in closing costs to refinance the home and go on to sell the home in 12 months this can cost more money than you’re saving in the end.
The last factor is calculating the refinance payback period by doing some math that will help guide your decision and you can use an online mortgage calculator. You’ll need the following figures to calculate your mortgage: estimated closing costs, current mortgage payment with the interest rate, the new refinanced rate (with the length of refinanced mortgage), and your remaining balance. If the final figure is lower than you thought, it’s probably not worth the time and you can wait for a better opportunity.