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Home buyers have been pleasantly surprised by steady opportunities in home refinancing markets despite a global expectation that interest rates would increase over the past few years. On the contrary, interest rates remain near all-time lows, while home values are hovering around all-time highs. This has created a surplus of available home financing, including opportunities to refinance mortgages. This has allowed homeowners to secure more favorable mortgage rates while freeing up cash to pay down other debts or use how they please.
In other words, opportunity abounds, and this is a prime time for homeowners to refinance. Nearly 100% of the loans we issued last summer were refinance loans, reinforcing the fact that consumers see this economic climate as a prime opportunity to secure better rates through refinancing.
With the average household in the United States carrying over $136,000 in outstanding debt (much of it high-interest), refinancing one’s mortgage can be a shrewd way to leverage home equity in order to pay down other debts. But refinancing is not necessarily the right move for everyone.
If you are considering refinancing your home as collateral for a loan, there are some questions you should ask first. They include:
• Are you having trouble paying your current monthly obligations, or do you project such trouble in the foreseeable future?
• Is your current mortgage rate higher than what you see advertised?
• Do you have $10,000 or more in high-interest debt such as credit cards, signature loans, home equity lines of credit (HELOCs), etc. with balances that have hardly abated?
• Do you have equity?
• Do you have the means to invest more of your financial resources toward your monthly mortgage payments if you’re able to see significant interest savings over the life of your loan?
• Are you currently paying mortgage insurance?
• Is the loan amount-to-value ratio of your home 80% or less?
If your answer to these questions is yes, then you are likely a strong candidate for a home refinance loan. And if you’re ready to pursue refinancing, here are some considerations to ensure you secure the best available rate:
Know What Your Property Type Means For Your Likely Rates
The type of property you are seeking refinancing for will impact the rate you receive. If the property you want to refinance is your primary residence, then you are likely to receive the best (read: lowest) rate. If the property is your secondary home, then you may be entitled to the second-best tier of rates.
Rental properties typically fall into the third tier of refinancing rates, and loan-level price adjusters will account for the fact that a rental property may represent a greater risk of nonpayment. Adjust your expectations accordingly when refinancing.
Consider A Cosigner
Mortgage rates are impacted by components such as occupancy, credit score, property type, loan amount and loan-to-value ratio. One’s debt-to-income ratio is not usually one of the factors considered when refinancing a mortgage, but adding a cosigner to your refinancing application could allow you to secure a more favorable mortgage rate.
This is not always the case, but it is worth exploring with the agency through which you are considering refinancing.
Pay Off Small/Revolving Debt
The rate you are able to secure when refinancing a property will depend in part on your FICO score. Don’t rush into the bank to seek a refinancing rate just because the climate is right. Instead, give yourself the best shot at a favorable rate by paying off your small and revolving debts before applying for refinancing.
This will typically improve your FICO score and, in turn, your likelihood of securing a favorable refinancing rate on your property. And, in an ironic twist, the capital you free up by refinancing your mortgage could be used to pay off even more of your larger debts, should you so choose.
Tidy Up Your Credit, But Also Your Home
If an appraisal is required, make sure your home is presentable by cleaning its interior and exterior. This may seem like a trivial matter, but it is not. Tidiness may enhance the appraiser’s perceived value of the property, and a clean, presentable home or condo certainly won’t hurt your odds of securing the rate you’re hoping for.
Though there is no hard evidence or data to support the idea that a tidier property is a higher-value property, that’s because it is immeasurable. But the idea is common sense — do you perceive your own home as nicer when it is dirty or clean? — and there is anecdotal evidence that suggests you should do a deep clean before undergoing an appraisal.
Lean On A Specialist If You’re Considering Cash-Out Refinancing
Federally backed loan programs such as FHA (85% to 80% loan-to-value ratio) and VA (100% to 90% loan-to-value ratio) loans are being impacted by recent reductions in cash-out refinancing options through these programs.
The net effect: reducing the federal government’s exposure on higher-risk loans while expanding private investment markets. With these changes in mind, consumers considering cash-out refinancing options should contact a refinance specialist before these changes go into effect, taking advantage of near-historically low rates while they’re still here.
Understand Why Refinancing Is So Popular
In the debt-ridden climate of 2020, nobody is above squeezing savings out of their tangible assets, and a home is the highest-value asset that most individuals will ever own. The benefit of refinancing is illustrated easily through the example of someone burdened with significant credit-card debt.
Say that you’re paying down a credit card with an annual interest rate of about 19%, the average rate for such debt. If you were able to refinance your home loan to obtain a rate of around 3% and use the loan to pay down your credit card, you would potentially eliminate years of wasted money on expensive credit card payments that deliver no real value in return.
Refinancing allows you to leverage your asset for cash now on the cheap, so long as you qualify. Few can say no to such an offer.