What’s the right rate to refinance?
After trending upward throughout 2018, 2019 has seen very little interest rate movement. In fact, average mortgage rates continue to trend toward year-long lows. Federal Reserve Chair Jerome Powell announced the Federal Open Market Committee (FOMC) would pause raising interest rates for the rest of the year. With today’s low rates, many homeowners could benefit from a rate and term refinance, or a refinance that lowers the mortgage rate or shortens the mortgage term. Making the decision to refinance your mortgage loan could help you lower your monthly mortgage payment, remove mortgage insurance, or even take cash out to fund a renovation project or other expense. Keep in mind, a mortgage refinance is a new loan origination and with that comes closing costs. With interest rates at 2019 lows, many homeowners are wondering, is it time to refinance my mortgage loan?
Although some homeowners may think they need to live in their homes for several years before they refinance, data shows that homeowners who bought a home or refinanced a mortgage in the last 1.5 years are prime candidates for refinance. This share of homeowners may not even be paying attention to mortgage rate activity, because they believe it’s too soon to refinance. Chief economist at Realtor.com, Danielle Hale, explained, “recent buyers who took on mortgages in 2018 are more likely to have higher rates and, thus, more likely to be eligible to refinance.”
LendingTree chief economist, Tendayi Kapfidze posits, “the general rule of thumb is that the prevailing rates on the market need to be 50 basis points lower than a borrower’s current mortgage rate for a refinance to make sense.” In 2018, the annual average rate for 30-year fixed-rate mortgages was 4.54%, roughly 50 basis points from where average rates currently stand. Even with rates trending lower, homeowners should not refinance their mortgage loans every time rates drop. Interest rates, like other economic forces, can be volatile and impacted by greater global trends.
There are numerous factors to consider when refinancing a mortgage, especially the cost of loan-origination fees. Most real estate professionals also recommend building up at least 20% equity in your home before refinancing your mortgage. For example, if you purchased a home last year with a low down payment program, you might not be the best candidate for a refinance, even if today’s rates are lower than yours. Also, if you plan to move in the near future, allocating your savings toward the closing costs on a mortgage refinance may mean you will be more financially stretched when it comes to buying your new home. Is reducing your mortgage payment by $100 each month worth the $2,400 in closing costs? The answer to this depends on how long you plan to stay in your home.
Every situation is different, and if you are interested in refinancing your mortgage you should meet with a mortgage professional. We can review your total financial picture and determine whether or not a mortgage refinance is right for you.