Posted On January 31, 2019
The Federal Open Market Committee (FOMC) voted to leave the federal benchmark interest rate this week, but further gradual rate hikes may be on the horizon. When the Fed raises rates, the cost of borrowing money will start to rise, including the cost of mortgage financing. Although rising rates may discourage some homeowners from refinancing, there are still many reasons to refinance, even when rates rise.
Lower Your Rate and Payment
Depending on when you financed your home, you could still be able to secure a lower interest rate on your mortgage. Your mortgage rate is impacted not just by the federal benchmark interest rate, but also your personal financial profile. You may have been a higher-risk borrower when you originated your first loan because you were a first-time home buyer with a low down payment, and average credit. If you have since responsibly repaid your loan, rebuilt your credit, and lowered your debt-to-income ratio, you could qualify for a lower rate or better terms.
Switch from Adjustable-Rate to Fixed-Rate
Some home buyers choose an adjustable-rate mortgage over a fixed-rate mortgage because they have lower introductory rates. However, after the initial term, the interest rate on an adjustable rate mortgage may begin to rise, especially in a rate rising environment. Refinancing from an adjustable-rate to fixed-rate will ensure that your interest rate stays the same for the duration of the term.
Stop Paying Mortgage Insurance
FHA loans require mortgage insurance for the life of the loan and other low down payment loans will require private mortgage insurance. Depending on the type of loan and the conditions, you may be able to stop paying PMI once the loan amortizes to a certain rate. In other cases, you will have to refinance to drop the mortgage insurance from your monthly payment.
Get Cash Out
Most real estate professionals suggest waiting until you have at least 20% equity in your home before withdrawing cash. Once you have that equity cushion, a cash-out refinance will allow you to take cash out of your home, by refinancing a new loan at a larger amount. You can use the cash to pay down high-interest debt, finance a home remodel or renovation project, or make an investment. If you want to take cash out, decide how you will use the money and ask a loan officer if a cash-out refinance is the best way to pay for that expense.
Before you refinance your mortgage determine how long it will take your payment savings to offset the closing costs on the new loan. For example, if your refinance will have $5,000 in closing costs, and your monthly payment savings will be $200, it will take a little over two years or 25 months to break even. If you would like to refinance in 2019, let me know and we can review your options.