"Should I refinance my house now?" The answer to this question involves more than just calculating savings on your monthly payment. Homeowners should also consider how long they plan to stay in their home and, if taking cash out as part of the loan, how they plan to use that extra money. Read more for additional factors to consider when making this decision.
One of the first steps in refinancing is understanding the value of your current home. This helps you determine how much equity you have, which is crucial for the refinancing process. Reach out to me for a free home valuation when you’re ready. Just click here to request a free analysis-----> Home Worth Report
"Gigi"
The 2% Rule
The 2% rule says you should only refinance your mortgage if you can lower your interest rate by 2%. This way, the money you save will cover the cost of refinancing. This works best if you’ve lived in your home for two years and plan to stay for at least two more.
When you contact your current or a new lender, they might say they offer “no-cost” refinancing or charge a small fee, but remember there are also refinancing costs, typically 2% to 5% of the new loan amount, which are added to your refinanced loan. On average, closing costs are about $5,000, depending on the loan and the state. The fewer times you refinance, the less extra cost you add to your loan. 1
For most individuals, the biggest question about refinancing is the monthly payment, or hopefully a payment reduction, as the refinancing costs are rolled into the loan amount.
Refinancing Break-even Calculator
If you’re curious about the cost of refinancing now, this refinancing break-even calculator is a handy tool to know exactly how long it will take you to break even on your refinance. 2
Factors to Consider When Refinancing
Can I eliminate PMI?
If you put down less than 20% when buying a home, you’ll need to pay private mortgage insurance (PMI), which costs $30-$70 per month for every $100,000 borrowed. Once you have over 20% equity, you can refinance to remove PMI. But if you plan to sell your home soon, refinancing just to save on PMI isn’t worth it.
Refinance an adjusted loan (ARM)
Many homeowners are facing financial difficulties because the Federal Reserve increased interest rates. They had adjustable three-year mortgages with balloon payments, which went from 2% to 8%, causing significant strain as the interest rate continued to rise. Refinancing to a lower rate might not fully solve the problem, but it could provide temporary relief depending on the loan terms and your lender’s flexibility.
Can I pull cash out?
As a homeowner, you might need extra cash for various reasons, such as making essential repairs on your home. Refinancing to pull out cash can be a smart move if the money you get from the refinance not only covers the refinancing costs but also generates future income or savings.
For example, if your refinance costs $5,000 and increases your monthly mortgage payment by $200, but it allows you to make needed repairs on your home or pay off a high-interest rate credit card or loan, your overall financial position is strengthened. Additionally, you would benefit from the property’s equity growth in the future should you decide to sell.
Predicting future interest rate reductions
It’s hard to say how many times the Fed will cut rates in 2025. The Fed looks at a lot of data, especially inflation and jobs, to make its decisions. Many people think there will be a small rate cut in September, but it’s tough to predict what will happen in 2025 because of the election and changes in the global economy.
To fight inflation, interest rates were raised 11 times from March 2022 to July 2023. Some experts think there will be three rate cuts in the rest of 2024 and four in 2025. If that happens, the federal funds rate, which affects mortgage rates, could be around 3.50% to 3.75% by the end of the year. Even if mortgage rates are a bit higher, it might be a good idea to refinance now and again in 18 months.
Final Thoughts
The decision to refinance varies for each borrower. After two years of rapidly rising rates, many are seeking relief from high mortgage payments, prompting them to consider refinancing. For others, the decision is more strategic, aiming to free up cash for repairs, refinance existing debt, or explore investment opportunities.
One of the first steps in refinancing is understanding the value of your current home. This helps you determine how much equity you have, which is crucial for the refinancing process. Reach out to me for a free home valuation when you’re ready. Just click here to request a free analysis----> Home Worth Report
"Gigi"
I’m here and ready to work for you!
The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
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