Is Now A Good Time To Refinance?

Over the past 2 years, the housing markets saw record-low mortgage rates. These drops came in response to COVID-19 when the Federal Reserve stepped in. It put downward pressure on mortgage rates, and soon enough, average they hit well below 3%. These low rates enticed potential homeowners as housing prices soared.

But while the housing frenzy continues, the record low rates have started to climb back up. So that begs the question – is now a good time to refinance? Here’s what you should know before you apply to replace your existing home loan.

The best time to refinance depends on the person. Factors like your individual circumstances, financial situation, and current mortgage rates should inform your decision.

But ultimately, refinancing is worthwhile when it will save you money. And there are a few ways a refinance can help you accomplish that.

If interest rates are lower now than when you originally borrowed your home loan, you could pay at the newer rate. In another case, you may have private mortgage insurance (PMI) on your current loan. But if you have over 20% equity in your home, you can refinance and cancel your PMI.

In addition, a refinance can be financially helpful. If you have a large expense or emergency cost to cover, you can apply for a cash-out refinance. This essentially allows you to tap into your property’s equity to cover said costly expense. For instance, you may have a home improvement project to complete or education costs for your child.

Some homeowners use their refinancing as an opportunity to consolidate their debt as well.

Again, circumstances vary. The best time to refinance a home will depend on your situation. If you want to find a “good time” to refinance, look for a time with the most financial benefits. Refinancing can be the right move when it provides you with savings in the present and long run. Furthermore, it should accommodate your financial situation in the near future and maintain the ability to comfortably cover closing costs or repayment.

There are eligibility requirements if you want to refinance your mortgage. These requirements will vary based on the lender you work with. However, you can expect every lender to use the same information during the approval process. You will have to provide them with details about your income, credit score, assets, debt and more.

Here are some of the refinance requirements you may need to meet while applying:

• A higher credit score (usually 620 and above)
• At least 20% equity in home (to avoid PMI)
• A lower debt-to-income ratio (usually 43% or lower)

Again, the actual minimum requirements you face will vary. For example, if you refinance with an FHA loan, it’s possible to get approved with a lower credit score. Rocket Mortgage® requires a 580 minimum score to qualify. In contrast, a conventional loan will require a higher score that meets the 620 minimum or above.

In another example, you may have lower than 20% equity in your home. Some homeowners with an excellent credit rating may still be able to refinance. Although, they may need to accept mortgage insurance or a higher interest rate in exchange.

Refinancing isn’t a simple decision. There are several pros and cons of refinancing you should be aware of no matter when you choose to do it.

To start, there are some financial perks to refinancing. First, you have new conditions with a new loan, such as a shorter term. A shorter term means that you pay off your loan quicker, build up equity faster, and spend less in interest over time. In combination with a lower interest rate, that can further lower the overall cost of your loan.

Not only that, but you also have new opportunities with refinancing. For instance, you can take your adjustable-rate loan and refinance for a fixed-rate version instead. This gives you predictability in your repayment. Or, you can opt for a cash-out refinance and use the difference in cash to cover a significant cost like education.

On the flip side, these savings may not be worth it if they are minimal. On top of that, your monthly payment has a chance of increasing if you shorten the repayment period. And your equity shrinks if you borrow against it in a cash-out refinance.

Because of these potential drawbacks, it’s important to time your refinancing carefully. You want to ensure you make the most of the transaction.

How Much Will It Cost To Refinance Your Home?

The overall cost to refinance your home loan will depend on several factors. For example, your home’s present value and the type of lender you work with can both contribute to the cost.

Generally, though, you should expect to pay around 2% – 6% of your loan’s total value when refinancing. This amount will cover your overall closing costs, such as:

• Application fee: Your lender may charge you for your application even if you are ultimately denied. 
• Appraisal fee: It’s common for lenders to require appraisals when you refinance. Appraisers usually charge $300 – $500 for the service.
• Attorney fees: Depending on your state, an attorney may have to review and file paperwork for your refinancing loan. These fees will vary based on location.
• Title and insurance: Your lender will likely require a title search during the refinancing process.

Some homeowners may be able to roll these closing costs into their overall loan balance. But that depends on the lender, the loan type and how much equity you have. By doing so you may accept a higher mortgage rate in exchange.

The type of refinancing terms you look for should depend on your financial situation. You want to make sure you can handle the monthly payments it would require. As a result, it may be wise to check out our refinance calculator. It can help you estimate those recurring costs and thus help you focus your loan options.

How Long Does It Take To Refinance Your House?

Refinancing is usually a quick process and takes 30 – 45 days in total. But every situation is different, and certain factors may delay the process. You will find that services such as inspections and appraisals that are conducted by third parties can affect your closing period. Additionally, your financial well-being and property size can also impact the total time it takes.

You can help simplify the process, though. If you want to shorten how long it takes to refinance your home, prepare and do your research ahead of time. Gathering any important documents can help streamline things. So, you should have information like this on hand:

• W-2 forms
• Tax returns
• Pay stubs
• Bank statements
• Business financial statements
• Proof of employment
• Investment or retirement income
• Billing statements
• Homeowners insurance policy information

In most cases, you’ll need this information to be recent. Lenders typically want to see statements from the current and previous year. So, prep your two most recent versions of the above documents before meeting with a lender.  

Another type of documentation you may need is anything on updates made to your home. For instance, you may have some receipts that record work done to improve or upgrade the home. These will be vital for the appraisal portion of your refinance. Lenders will typically require one, similar to how you likely needed one for your original loan. If you want to improve the outcome of that appraisal (and speed up your closing), you can put some effort into your home’s appeal. Work done on the exterior is often recommended to better your home’s curbside appeal.

Refinancing your mortgage is a big decision. It relies heavily on your circumstances and the mortgage market. While current rates have increased from the 2020 lows, they’re still competitive compared to pre-pandemic years.

So, if your current mortgage rate exceeds the current market average, it may be a good time to refinance. Of course, the decision should also fit your financial situation. It may not be the right time if you struggle with debt or have a low credit score. Consider the impact a new loan may have in the long-term before you apply with a lender.

If you want to research before you dive in, check out Rocket Mortgage^® refinancing resources for more information. It can help you get a better idea of what you need when it comes to refinancing your home.