As interest rates go up, homeowners thinking about refinancing may be rushed to do so — after, if they wait too long, they risk having to pay a higher rate.
While that’s a valid concern in a rising rate environment, there are also other factors that come in to play when deciding when to refinance. If you’re considering refinancing your home mortgage, here’s what you need to consider:
How your interest rate compares to market rates
Given the closing costs involved with a refinance, it typically doesn’t make sense to refinance unless you can cut your mortgage rate by at least one point. However, there are some circumstances where it might make sense to refinance even if you end up with a higher rate.
Refinancing into a shorter-term loan or from an adjustable-rate to a fixed, for example, may be a smart move even if it means paying slightly more in the short-term.
“If you refinance from a 30-year term to a 20-year or a 15-year, your payment may not be optimally lowered, but you may save a lot of money over the long haul and build equity more quickly as you go along,” says Keith Gumbinger, vice president of mortgage and consumer loan information website HSH.com.
The amount of equity you have in your home
Your loan-to-value ratio (LTV), or how much equity you have in your home compared to its market value, is another important factor in deciding when to refinance. Most banks want borrowers who refinance to have at least 20 percent equity in their home. The more equity you have, the more protection you have in the future from ending up underwater if home values fall.
If you are paying private mortgage insurance because you had less than 20 percent equity in your home when you got your mortgage, but you now have more equity, you may be able to get rid of the PMI by refinancing. If the home’s value has increased enough, the new lender may not require PMI.
Your future plans to stay in the home
The closing costs and general stress involved with refinancing mean that it doesn’t make sense to refinance if you’re planning to move again in a few years. If your plan is to move out within the next five years, it may not make sense to refinance now.
“If you’re selling the property in the near future, you’re going to be accessing the home equity wealth anyway,” says Daren Blomquist, senior vice president with ATTOM Data Solutions. “There’s no reason to pay the costs associated with refinancing and also pay, shortly thereafter, the closing costs on selling the home.”
Talk to an FOA mortgage advisor today to find out more about when it may be beneficial to refinance and which situation is right for you.