Knowing the Best Mortgage Option for You
Choosing to refinance your mortgage can help you save a lot of money on your monthly mortgage payment, but just how much you can save all depends on when you choose to refinance. It is also important to note that just because you might be saving on your mortgage payment, refinancing might not always be in your best interest depending on your circumstances.
If you are wondering, when is the best time to refinance your mortgage, then here are some things you should be thinking about that will help you make the best decision for your current and future housing needs.
Is Your Current Interest Rate Above 4.92%?
The goal of most refinances is to save money. With interest rates hovering between 3% and 4% in recent months, this means you will enjoy significant savings if your current rate is at or above 4.92%. But timing is everything. In 2022, interest rates are likely going to rise, with some experts suggesting they could reach as high as 4% or higher by year’s end. With this in mind, if saving money is your goal, then the sooner you can refinance the better.
How Long are You Planning on Living in the Home?
Refinancing your mortgage means that you will once again have to pay closing costs, which can often range between 3% and 6% of the loan’s principal. If you are not planning on living in your home for several years, then there’s always the chance that the closing costs could wind up being more than the amount you stand to save on your mortgage payment.
If you already know that you will be moving sometime soon, then choosing not to refinance might save you more in the long run. Talk to your mortgage provider and have them run the numbers to see what your new rate would be and how much you could save versus the cost of your closing before making your decision.
Do You Have at Least 20% Equity in Your Home?
Most mortgage lenders usually won’t approve a refinance if the borrower has less than 20% equity in their home. If you don’t have at least 20% equity, then you may be required to put more money down on your refinance just to qualify. This could wind up making it even more difficult for you to break even, despite the monthly savings you get with a lower interest rate.
Has Your Credit Worsened Since Buying Your Home?
Owning a home doesn’t automatically mean you can get approved for a refinance. You still need to meet all the same approval requirements that you met when you got your original loan. Before applying for a refinance, check your credit report to make sure your score hasn’t dropped. If it has, then you will want to clean up your credit before you apply to help ensure you get the lowest rate possible.
What is Your Debt-to-Income (DTI) Ratio?
Just like your credit, your debt-to-income ratio needs to be within a certain range to qualify for the best rates. For a conventional loan, lenders will usually work with you if your DTI is no higher than 43%. FHA loans are a little more accommodating, with DTIs of 50% still capable of being approved. But, if at all possible, make sure your DTI is as low as possible to improve your odds of approval and of securing the best rate.
The Bottom Line: Should I Refinance My Mortgage Now?
Every homeowner’s situation is unique, so there is no simple blanket answer that applies to everyone. To help ensure that you make the right decision for your financial health, take the time to consider the above questions before you apply to help ensure you get the results you’re hoping for out of your refinance. With rates expected to start climbing, you might want to get started by checking your credit and your DTI now, because these two factors can take some time to improve.
