Big Drop In Mortgage Rates Again: Is Now The Good Time To Refinance Your Mortgage

With mortgage interest rates hitting a 17 month low this week, it's finally time to start talking refinancing. But remember, it's not just about getting a lower interest rate, and a lower interest rate doesn't always mean it's the right decision. So in today's video, I want to cut through the noise and I want to get down to the facts about when a refinance makes sense. Because honestly, it has to be worth your time, money, and effort. And if you're wondering when is the right time, and why you should be considering it now, you're in the right place. In today's video, I want to speak to the breakeven for deciding on doing a refinance into a lower mortgage rate. I also wanted to talk about the flip side, like when are the key scenarios when refinancing could be a smart financial decision, regardless of the interest rate. I have four options that I want to break down, including a cash out refinance, which can give you access to your locked up equity for other big investments. Or maybe you want to refinance for debt consolidation. This is a great strategy given our higher inflationary market and our high credit card debt. Eliminating mortgage insurance is another great reason, especially as appreciation starts to return back to normal levels. And rounding out the list today is a streamlined refinance, which we're doing a lot of right now. That is for a VA or an FHA loan specifically, and it will help you cut unnecessary costs. By the end of this video, you're going to have a clear understanding of when refinancing makes sense and how to maximize its benefits. But of course, before I get too far ahead of myself, do me a favor and give this video a thumbs up and subscribe to my channel to stay updated on everything real estate and mortgage related. Plus, as you know, sharing is caring. This information can save someone you care about thousands of dollars. So help someone you know who has questions about refinancing. All right, well, let's jump in. Rates have been going up since forever. Not really, but it feels like it. I mean, rates have been going up since the beginning of 2022. So now that they finally started coming back down again, there's a lot of desperate lenders out there who will happily sell you a refinance even if the benefit is too small or the solution is not a great fit yet. In fact, if you have a mortgage loan, you've probably already been getting the emails, letters, and texts. So I want to arm you with the information, not sell you on a solution. And as an extra gift for hanging with me on my channel, I've posted the instructions to put yourself on the national do not call list, as well as the opt out prescreen in the description below. Because while I am a fan of competition, I am a huge no on being harassed so someone else can hit their sales goals. When considering a refinance, know that you will be paying off your existing mortgage and replacing it with a whole new loan with different terms, such as a new interest rate, payment schedule, and term length. And you may also have additional closing costs. Essentially, it allows you to restructure your mortgage to better fit your current financial goals and today's circumstances. If you currently have a second lien, like a HELOC that you've pulled out after the fact, or a down payment assistance loan that you got with your purchase, a refinance is also going to require either paying off that second loan or resubordinating it into the new loan. It's important to ask a lot of questions about how those are affected if you in fact have them. With today's interest rate almost a full 2% lower than the 8% high that we hit back in October 2023, the question of refinance could be an impactful one. The answer, however, is it depends. I mean, it depends on when you purchase and locked in your interest rate, if your circumstances have changed, or if you think rates will continue to come down further. I personally do a breakeven analysis with each and every client walking through their numbers and their goals. Let's look at a quick example to put this in context. Say you have a $500,000 mortgage loan locked in at a 7.5% interest rate. The principal and interest, or the P&I, on that loan is $3,496 a month, plus your escrows, plus your insurance and taxes, and mortgage insurance, if you have it. If today's rate is six and a quarter, as an example, the new P&I would be $3,079, or a savings of $417 every month. Now you have to look at the closing costs. Typical closing costs for refinance might be $5,000. So the breakeven on doing this could be 12 months. And considering rates are expected to keep declining, I might look at that and consider waiting. However, like the Ruth team's lender-free refinance guarantee, many lenders are offering a no-cost refinance. Then the breakeven turns into an easy yes. What is also great is that you get to skip one or two mortgage payments with that refinance, which not only helps your monthly budget, but also your short-term cash flow. Where the decision gets a little less obvious is where the existing mortgage interest rate is locked in closer to where the interest rate is today. So say, as an example, you have a mortgage that's locked in at 6.875, and the new mortgage is six and a quarter. In this case, the savings is only $200, or $206 a month. While $200 is a good chunk of money, you have to ask, is it worth your time and energy to do the refinance? Or do you hold off a little longer? Especially if you need a little more value in your home to help out with dropping mortgage insurance or paying off a second lien, you might want to wait until spring when home values start to go up again. Remember, we've been higher for longer. As inflation drops and the labor market slows, so goes mortgage interest rates. Refinancing for a lower mortgage rate should also take your goals in mind. Meaning, what if you're planning on moving into a new primary home in the spring? You would want to refinance your existing one now as a primary. That would get you the lowest interest rate possible on this home as well as the next one before converting your current home into an investment. Or what if you had to get a cosigner when you bought? Or you'd sold a home in between and you're able to put down a largeable chunk on the principal. Dropping the interest rate and being able to make the changes that you want to the loan could double up the benefits. This is why there really isn't a one-size-fits-all yes when it comes to refinancing. But today's lower rates should have you asking the question. Outside of securing a lower interest rate, my team continues to do a lot of refinances for other very good reasons. Let's dive into four of the top reasons you might consider refinancing despite the rates. The first scenario is a cash out refinance, which is probably the most common type of refinance outside of dropping the interest rate. So here's how it works. You refinance your mortgage for a higher loan amount than you currently owe and you receive the difference in cash at closing. For example, if you owe $300,000 right now on your loan and your home is worth $500,000, you can do a cash out refinance for $400,000. That's an 80% loan value. You'll pay off the existing loan, cover closing costs, and get about $100,000 in cash at the closing table. What can you do with that cash, you ask? The possibilities are almost endless. You can apply it to home improvements, debt consolidation, investing in more real estate, or even creating a savings cushion. But it's crucial to use that money wisely. And a huge bonus, that $100,000 that you just received at the closing table, is not considered income. Therefore, you aren't taxed on it. The second option is a debt consolidation. Many people in higher inflationary environment are finding themselves with credit card debt or personal loans that carry high interest rates. If that sounds like you, you are not alone. And a debt consolidation refinance might be a smart way to lower your overall interest costs by combining all of your debt into a single lower interest mortgage payment. There are two ways to approach this. You can take cash out from the refinance and pay off all the debts yourself, or you can have the lender handle it directly through escrow. This latter option can be especially helpful if your debt to income ratio is on the higher side, as it may improve your chances for qualifying for the new loan. Plus, it takes out the guesswork out of deciding whether to pay off which specific debts, because everything is taken care of automatically. Our team uses a very simple tool that you can use to enter in all your current debts with their associated interest rates to calculate your overall blended interest rate, the one that you're paying every month. There's a link in the description below for this tool. I suggest you check it out. The third option is eliminating mortgage insurance. If you currently have an FHA loan or you were required to get mortgage insurance on your conventional loan when you first took out your mortgage, refinancing can be an effective way to lower your monthly payments by getting rid of that extra cost. Many people with FHA loans, or those who initially had less than 20% equity in their home, have been paying monthly mortgage insurance premiums, which can add a significant amount to your monthly mortgage payment. By refinancing, especially if your home value has increased or if you've built up enough equity, you may be able to switch to a conventional loan from an FHA and remove the requirement for that lifetime mortgage insurance altogether, resulting in substantial savings every single month. Refinancing into a new loan with better terms or a lower interest rate while eliminating that mortgage insurance could be an excellent opportunity to lower your overall housing costs and improve your financial situation. And then there's the fourth, and this is one of my favorites. If you currently have a VA or FHA loan, a streamlined refinance could be a great way to save hundreds of dollars every single month with minimum hassle. These types of refinances were designed to make the process quick and easy, often requiring no appraisal, minimum documentation, and sometimes even no income or credit qualifications. It's a straightforward way to lower your interest rate and your monthly payments without the usual complexities, making it an excellent option for many homeowners looking to take advantage of today's declining rates. One thing to note about these though is that the VA and FHA loans require that you've made six mortgage payments before doing a streamlined refinance. So if you feel like rates are more to drop, you have to assess if jumping in now is enough of a benefit to wait six more months before doing it again. Remember, refinancing should only be done when it makes financial sense. As rates continue to drop, you'll likely see many online and darkroom lenders coming out of the woodwork, offering what seems like unbelievably low interest rates. Don't be tempted by the offers that seem too good to be true, because as your Uncle Olaf once said, if it sounds too good to be true, it probably is. We're here to help you make the right decision for your unique situation, even if it means waiting until the time is right for you to refinance. Our goal is to provide honest guidance so you feel confident in your choices. If you're considering a refinance, or maybe you just want to consult with a mortgage expert to dial in your options, click the link below. Well, that's all I have for you today. If you want to dive in a little bit deeper in today's housing market conditions, check out the video I have linked on the screen now, and I'll see you next time.