To refinance your mortgage, you need to compare current mortgage rates with your existing loan’s interest rate. While it can be tempting for homeowners to act quickly when mortgage refinance rates are low, additional refinancing costs need to be considered.
Before starting the refinancing process, you need to thoroughly review your current financial situation. Lenders will look at your income, debts, credit history, and the value of your home to determine loan eligibility.
Top Reasons to Refinance a Home
Some people find that refinancing their home is a smart way to manage their money. If you want to get rid of the risks that come with adjustable-rate mortgages, get cash to start investing in real estate, pay for home improvements, or lower your interest payments over time, here are some of the reasons why refinancing might be a good idea.
1. Fixed-Rate Mortgage
If you now have an ARM (adjustable-rate mortgage), you might want to refinance to get a fixed-rate mortgage. In a rising interest rate environment, a fixed-rate loan is the type of loan that can shield you against future rises in interest rates, thus helping you save money.
2. Debt Consolidation or Home Improvements
Refinancing lets you use home equity for big expenses like paying off high-interest debt or making home improvements. You can pay for these expenses at a much lower interest rate than if you used high-interest credit card debt or personal loans.
Avoid using a cash-out refinance for vacations, luxury items, and other unnecessary purchases. It’s best for things like home improvements, which can increase the value of your home and benefit your short and long-term financial situation.
3. Keeping the Property Long-Term
Refinancing to a 30-year mortgage could reduce your monthly mortgage payments, freeing up money in your budget for other financial goals if you plan to stay long-term. In contrast, if you shorten your loan term, you can end up paying much less interest overall, even though your monthly payments would be higher.
4. Remove Private Mortgage Insurance (PMI)
Refinancing your mortgage can eliminate private mortgage insurance (PMI) costs. PMI is typically required when a homeowner buys a home with less than a 20% down payment, meaning the loan-to-value (LTV) ratio is over 80%. As you pay down the mortgage and possibly benefit from increases in home value, the LTV ratio can drop below 80%. When you refinance, if an appraisal shows that you have built enough equity in the home to reduce the LTV ratio to 80% or lower, you can qualify to have the PMI removed, which will reduce your monthly mortgage payments.
5. Lower Your Interest Rate
If interest rates have gone down since when you first got your mortgage, refinancing at a lower rate could save you money over the life of the loan.
Because the average 30-year fixed rate is currently higher than it has been for the last 20 years, most people have a lower interest rate than current market rates. But if you purchased a home within the last two years and, due to a bad credit score got a higher rate than you could get now, it could be a good time to refinance for that reason alone – as long as you plan on being in the house long enough to make back the closing costs in the monthly mortgage payment savings.
Standard Requirements for Refinancing
To improve your chances of getting approved for refinancing, It’s important to know and meet the basic standards that mortgage lenders look for. Here are some factors you’ll need to consider before refinancing:
1. Mortgage in Good Standing
You need to have a history of making on-time payments on your current mortgage for a significant period. Lenders usually want to see a history of on-time payments before they are open to refinancing your loan.
2. Seasoning (Waiting) Period
Before you can refinance, you need to have had your first mortgage for a certain amount of time. This is called the “seasoning period”, which is typically 180 days, but different lenders may have different rules. A conventional mortgage doesn’t have to follow the same rules as VA and FHA loans do, so the seasoning time will be different for each lender.
The seasoning period for a VA or FHA cash-out mortgage refinance loan is 210 days (7 months), whereas a USDA loan refinance has a 6 to 12-month seasoning period.
3. Minimum Credit Score
The importance of your credit score cannot be overstated when you’re trying to refinance your home and get the lowest rate. In 2024, the lowest credit score you need to refinance is, on average, at least 620. However, depending on your current lender and the loan package you’re applying for, the required credit score can be anywhere between 580 and 700.
4. Debt-to-Income Ratio
The lender will usually set a maximum debt-to-income ratio (DTI) that you should not go over in order to refinance. This ratio shows how well you can handle your monthly bills and other debts.
Ideally, most lenders want to see a DTI of 36% or less; however, some lenders may be willing to refinance if your DTI is between 36% and 50%. In rare instances, a lender may grant you a loan if your DTI is over 50%.
5. Cash to Close
Make sure you have enough money to handle closing costs, which might include loan processing, home appraisals, and other administrative fees. How much you’ll need is contingent upon the dollar amount you’re refinancing and the terms and conditions your lender has agreed upon.
You can also roll closing costs into your refinanced mortgage to avoid out-of-pocket expenses, either partially or fully. This will increase your mortgage balance, which in turn increases your monthly payments.
The Basics of Home Refinancing
Your decision to refinance your home can affect your mortgage payments, interest rate, and loan term; follow these steps to better navigate the process.
Step 1: Assessing Your Financial Health
Before you think about refinancing, you should look at your present finances. Check your credit score, look at your monthly income and spending, and figure out your debt-to-income ratio (DTI).
Your equity, which is the value of your home minus the amount you still owe on your mortgage, is also very important. Your chances of obtaining better refinancing conditions increase based on how much equity your home has.
Step 2: Know When to Refinance
With refinancing, timing is everything. Consider refinancing when interest rates are lower than the rate you currently have to save money and reduce monthly payments. If your financial situation has improved, you may be able to refinance at a better interest rate and enjoy more favorable terms. Don’t forget about the costs that might come up, like application fees, assessment fees, and mortgage insurance.
Compare the lenders’ refinance rates, closing costs, and customer service ratings before choosing one. To find the best refinancing deal for your needs, look at both the annual percentage rate (APR), total fees, and what other homeowners have said.
Step 3: Explore Your Refinancing Options
You can choose a refinancing plan that works for you if you know what the options are. With a rate-and-term refinance, you can change the interest rate and/or the length of your loan, whereas a cash-out refinance gives you the ability to take cash out of the equity in your home for larger expenses like debt consolidation or home improvements. Keep in mind that to do a cash-out refinance, you must have at least 20% equity in your home.
Step 4: Gather the Necessary Documents
Get the necessary papers together before you start the refinancing process, such as valid government-issued identification, pay stubs from at least the last 30 days, tax returns from the last two years, and bank statements for the last three months.
Include proof of any other financial assets that could show your ability to pay the mortgage if something were to happen to your current employment, as well as your current credit report, and statements from any outstanding debts.
Successfully Execute the Refinance Process
Once you have completed the preparation phase, you’re ready to begin the mortgage refinancing process.
Step 1: Apply for the Loan
Keep in mind that when you apply for a loan to refinance, you may be able to choose between FHA loans, VA loans, and USDA loans, depending on your qualifications. You can even refinance your conventional loan into an FHA loan if you meet the qualifications.
You can choose a shorter loan term to build equity faster or a longer loan term to lower your monthly payments. Carefully look at the annual percentage rate (APR), which shows how much the loan will really cost you each year.
Step 2: Wait for Underwriting and Approval
Lenders look closely at your financial information during screening to figure out how risky you are. Your debt-to-income ratio (DTI) is very important to this process; it shouldn’t be more than 43%. The lender will also look at your loan-to-value ratio (LTV) to see if your home has built up enough equity. Being straightforward with your lender can speed up the loan’s approval and underwriting process.
Step 3: Complete the Closing Process
Closing is the last step in refinancing. You may be able to negotiate a different interest rate for your mortgage refinance by signing a new loan agreement. Budget for closing costs, which are typically between 2% and 5% of the loan amount. After closing, you have three days to cancel(in writing) if you wish to.
Is Refinancing in 2024 a Good Idea?
When considering refinancing your mortgage in 2024, it’s important to evaluate your personal circumstances and the state of the economy. Although everyone’s situation is different, here are some key factors to keep in mind:
- Interest Rates: If the current mortgage rates you can get are lower than the ones you have now, refinancing could save you a lot of money. According to Bankrate, rates are going down. The 30-year fixed mortgage rate is now hovering around 7%, down from a high of over 8% the year before. The Mortgage Bankers Association thinks that by the end of 2024, the average rate could drop to 6.1%.
- Loan Terms: If you shorten the length of your loan, you may have higher payments, but you’ll pay less in interest over the life of the loan. For example, a $100,000 loan with a 6.2% interest rate over 30 years would cost about $612 a month, for a total of $220,320 over that time. If you move to a 15-year term, your monthly payments will go up, but your total will be $153,900. That’s $66,420 saved in interest, which could be a significant reason to switch in 2024.
- Market Predictions: Pay attention to how the market is moving. Average mortgage rates are influenced by the Federal Reserve’s overnight federal funds rate, which is currently at 5.5%. Many predict that as inflation decreases this year, the Federal Reserve will lower rates, subsequently reducing average interest rates.
Make sure that refinancing in 2024 fits well with your financial plans by doing your homework and talking to a mortgage advisor.
Is It Ever Wise to Refinance to a Higher Interest Rate?
Most people refinance to reduce their monthly payments and interest rates, so refinancing to a higher rate could seem contradictory. In some cases, though, this choice may be the right one.
Cashing Out Equity: A higher rate of cash-out refinance can make sense if you need the equity in your house to cover large costs like debt consolidation, hospital bills, or home repairs. This turns your equity into cash you can spend right now.
Better Terms: Even at a higher interest rate, a longer-term loan might lower your monthly payments. Here’s an example:
- Original loan: $250,000 at 3%, 15 years, $1,726/month
- New loan: $250,000 at 5%, 30 years, $1,342/month
(Not including presumed taxes and fees.)
How to Refinance a Home in 2024: A Recap
If you’re thinking of refinancing your house in 2024, you need to know the costs. Recent changes in interest rates mean that, over time, getting a lower rate than your original loan could save you a lot of money.
- Current Loan Assessment: Assess the interest rate, monthly payment, and remaining term of your current mortgage.
- Compare Rates: Locate the best deal by comparing refinancing rates from several lenders. Recall that even little variations in rates can affect long-term expenses and result in large monthly savings.
- Consider Your Goals: Do you want lower monthly payments, faster mortgage repayment, or home equity? How you should go about refinancing your loan is entirely dependent on your goals.
- Cost Assessment: Take into consideration the closing costs, because they are likely to have an effect on how cost-effective the refinancing truly is for you.
- Consult with Experts: A mortgage professional or financial advisor can give you individualized guidance that is tailored to your specific financial position.
By carefully considering the above factors, you can decide if refinancing your home in 2024 is the best course of action for you.
Disclaimer: The information provided by New Western does not, and is not intended to, constitute legal advice; instead, all information, content, and materials in this article are for general informational purposes only.
