Thanks to record interest rates, the past two years have been a godsend for mortgage refinancing. With rates already rising – and experts predicting continued increases – refinancing may seem less attractive now.
While it’s true that 2022 is unlikely to offer the same level of opportunity as 2020 and 2021, this year will still be a good time to refinance millions of homeowners. Record levels of homeowner’s equity mean cash refinances are on the table for many as well. Meanwhile, with rates still historically low, it will usually still pay off to convert an old variable rate mortgage to a fixed rate loan.
Regardless of the type of refinance, you need to make sure that the terms of the new loan match your needs.
“If you shop carefully and are a qualified borrower, you will always have a good opportunity to refinance,” says Melissa Cohn, regional vice president of William Raveis Mortgage.
At the start of the year, pay close attention to the following three areas to prepare for a successful refinance.
Mortgage rates are expected to rise
Since the start of the year, rates have been on the rise. Current mortgage rates hit 3.22% in early January, the highest level since May 2020.
Why are the rates going up? Supply chain shortages, strong consumer demand for goods and labor shortages have pushed inflation to its highest level in decades. This led the Federal Reserve to start modifying the accommodative monetary policy it put in place at the start of the pandemic.
Following the Federal Open Market Committee meeting in December, Fed policymakers announced plans to cut purchases of Treasury and mortgage-backed securities faster than expected and start raising the rate. federal funds starting this spring. Although the Fed does not set mortgage rates, these changes will increase costs for mortgage lenders and these costs will be passed on to borrowers.
This is largely why experts widely agree that mortgage rates will rise further in 2022, ending the year between 3.4% and 3.7%.
In general, refinancing tends to be profitable if you can reduce your interest rate by at least 0.75 percentage point. With increasing interest rates, it is more important than ever to shop with different lenders for the best rate.
According to Freddie Mac, borrowers who get an extra quote can save an average of $ 1,500 over the life of the mortgage. These average savings increase to $ 3,000 with five additional quotes.
Consider looking at the rates once you’ve found a rate you’re comfortable with. This ensures that your rate will not change until your loan closes. You may also want to consider a floating down foreclosure rate, which will allow you to capture a lower rate if rates drop during your foreclosure period. However, this option can cost between 0.5% and 1% of the loan amount depending on your lender and the length of the lock-up period.
Your credit score will always be the key
Whatever the market conditions, your credit score is an important factor in determining the interest rate that lenders will offer. Borrowers with higher scores are entitled to lower rates. The pandemic has caused a lot of trouble in people’s finances, Cohn says, so you need to know where you stand. While the average credit score rose to 716 in April 2021 – eight more points year over year – not everyone saw an improvement.
“It’s very important to take the time to know your credit, see what you can do to repair your credit, and make sure that you are doing your best to apply for a mortgage,” says Cohn.
The minimum credit score required to refinance will be set by your lender and may also be influenced by the type of loan you are applying for. The typical minimum score for a conventional refinance, for example, is 620. On the other hand, loans guaranteed by the Federal Housing Administration can be obtained with a score as low as 580. Typically, you need a score of 740 or more to be eligible. for the best rates.
If your score is below 740, and especially if it has gone down since you took out your current loan, think about ways to improve your credit before you apply.
Get a copy of your credit report from each of the credit bureaus, check for errors that could lower your score, and have them removed. You’ll usually be able to access one free report from each rating agency per year, but pandemic rules mean you can request one free copy per week until April.
Pay off your debts if possible and don’t open new credit accounts. Credit bureaus can also access your bank account (with your permission) and factor additional information such as a history of on-time cell phone payments, utilities, or rent on your profile, which can sometimes also increase your score.
Demand for cash-out refinancing could surge
While soaring house prices have been a boon to sellers, homeowners who have decided to stay put can also reap the rewards.
Home equity reached an all-time high of $ 9.4 trillion in the third quarter of 2021, or about $ 178,000 in usable equity per owner, according to the real estate data company Black Knight. As a result, cash-out refinancing was 36% higher year after year in November and Black Knight expects this trend to continue.
“A lot of people want to refinance to try and get some of the capital they need during the pandemic,” says Cohn.
A cash-out refinance is a new loan taken out for an amount greater than your current mortgage. Most of the new loan goes to pay off your previous mortgage, with the remaining balance paid directly to you. You can use the proceeds of a credit buyback for almost any purpose, including paying off higher-interest debt or doing home repairs. Keep in mind that lenders often require that you maintain at least 20% of the equity in your home to be eligible for a withdrawal refi. If you’re happy with your current mortgage rate, you may also want to consider a home equity loan or home equity line of credit.
Another tip: make sure refinancing makes financial sense
Keep in mind that the refinancing closing costs can be anywhere from 2% to 6% of the loan amount and should be a priority when considering a refi.
Use a mortgage refinance calculator to determine what your monthly payments might be with your new interest rate and the length of your loan. Compare different rates and types of loans, such as fixed rate and variable rate mortgages. Sometimes it may be better to change the term of the loan than to change the interest rate.
Once you have an idea of what your new monthly payment will be, calculate your breakeven point. Divide your closing costs by the amount you will save on your monthly payments. The result will be the number of months it will take to recover your refi charges. The faster you recoup costs, the more profit you will get from a refi.
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