Is Now A Good Time To Refinance?

Refinancing your home loan can help you save money and update your loan’s terms, but as with many things in life, timing is everything.

If you time a refinance right, you may be able to lock in a lower interest rate or access the equity in your home to cover unexpected expenses without having to rely on higher-interest credit cards. If you refinance at the wrong time, you risk paying more in interest or increasing your monthly mortgage payment for the life of the loan.

So is now a good time to refinance your mortgage? And if not, when is the best time to refinance your home? Before you can decide, you need to take a look at your unique financial situation.

Here’s what you should know before you apply to replace your existing home loan.

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

Ultimately, refinancing is worthwhile when it will save you money or let you access the equity in your home to cover your expenses. There are a few ways a refinance can help you accomplish that.

If Interest Rates Are Lower

If interest rates are lower now than when you originally took out 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, refinancing is one way to cancel this PMI.

If You Need To Access Your Home Equity

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.

If You Benefit Financially

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 allow you 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 in the case of a cash-out refinance
• A lower debt-to-income ratio (usually 43% or lower)

Again, the actual minimum requirements you face will vary based on lender and type of loan. For example, if you refinance with a Federal Housing Administration (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 less than 20% equity in your home and be able to refinance, though you will not be able to take out cash unless you have an excellent credit rating. Although, you may need to accept mortgage insurance or a higher interest rate in exchange.

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

Reasons It May Be Worth It To Refinance

To start, there are some financial perks to refinancing. First, you have new conditions with a new loan, such as a potentially shorter term. A shorter loan term means that you pay it off 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. Another option is that you can opt for a cash-out refinance and use the difference in cash to cover a significant cost like education.

Reasons It May Not Be Worth It To Refinance

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.

Generally, though, you should expect to pay around 3% – 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 require a title search during the refinancing process.

Options To Make Refinancing More Affordable

Some homeowners may be able to roll their refinance 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 will be paying interest on these items now covered by the loan, and it’s possible 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 mortgage 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.

Refinancing is usually a quick process and typically 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.

Financial Documents You’ll Need To Refinance

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.

Other Documents You’ll Need To Refinance

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 could 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.

If you’re still trying to decide if now is the right time to refinance your home, check out the answers to some frequently asked questions below.

When is it worth it to refinance?

Essentially, it can be worth it to refinance any time you would benefit financially. What this means, though, will vary depending on the person. Depending on your financial situation, refinancing could make sense if it gets you a lower interest rate, makes your monthly payments more affordable or allows you to access your home equity to improve your financial situation.

How much should interest rates drop to refinance?

Refinancing is generally worth it if a homeowner is able to lower their interest rate by at least 2%. However, even a 1% rate decrease can make a refinance worth it depending on a homeowner’s financial situation.

Are refinance rates going down?

Mortgage rates are expected to decline in 2024, with Fannie Mae predicting an average mortgage rate of 6.8% by the fourth quarter. This means it could be the year for homeowners who bought a home during the last several years to consider refinancing to a lower interest rate.

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. Rates are also expected to drop in 2024.

So, if your current mortgage rate exceeds the current market average or you want to tap into the equity of your home, 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.

Are you interested in refinancing your mortgage now? Take action and start your application with the Home Loan Experts at Rocket Mortgage.