When Is the Right Time to Refinance Your Home?

Historically low interest rates surprised experts in 2019 and incented first-time homebuyers and experienced homeowners alike to explore the housing market. Many current homeowners may not realize that they too can benefit from lower interest rates.

If you are considering refinancing your home going into the New Year, here's everything you need to know about what the current state of the market means for you and how things could change in 2020.

What does refinancing mean?

According to The Balance, refinancing means replacing an existing loan with a new loan. Essentially, you pay off the debt of an old loan with the new loan. Ideally, homeowners refinance to receive a mortgage with better terms or features that improve their finances in the long-run.

A homeowner will usually identify an existing loan that they would like to improve in some way. Like a home loan, they can shop around and get quotes from different lenders to see if they can find better loan terms for their current situation.

Much of the process is similar to applying for a home loan. You will have to apply, and the lender will evaluate your application against their qualifications. If your refinance loan gets approved, the new loan will pay off the existing debt completely. Then, you will continue to make monthly payments on the new loan until it's paid off or refinanced again.

Benefits of refinancing a mortgage

As you can see, refinancing is a great opportunity to lock in more favorable terms on your mortgage. While most homeowners are attracted to receiving a lower interest rate on their loan, Investopedia explains there are other reasons refinancing could be beneficial.

For example, you could choose to refinance to shorten the term of your mortgage while paying less in interest payments. If one of your goals this year is to pay off your mortgage, refinancing could help you achieve this. Also, this approach is a great opportunity to switch from a fixed-rate mortgage to an adjustable-rate mortgage, or vice versa. Depending on the rates and how long you plan to live in your current home, switching the rate of your loan can help you budget better.

Finally, you may be able to tap into your equity or consolidate debt when refinancing. To determine how refinancing can benefit your current situation, it's best to sit down with a trusted financial advisor and explore your options. If you rush into refinancing too quickly, you can sometimes find yourself with more debt or struggling with some of the associated costs.

Should I refinance when interest rates are down?

The decision to refinance your home is dependent on your own financial situation and long-term goals. As of Dec. 26, 2019, a 30-year fixed rate mortgage has an interest rate of 3.865% APR, which is in line with 2019 trends. Since interest rates have hovered near or below 4% over the past year, many homeowners have already taken the opportunity to refinance and lock in these rates for their future payments. For the week ending Dec. 20, 2019, the Refinance Index was 128% higher than the same week one year ago. But just because others have been applying for refinancing doesn't mean that's the right choice for everyone.

NerdWallet recommends every homeowner take the time to calculate the savings they could receive from a new loan to see if it's worth applying. Consider how much the appraisal, credit check, origination fees and closing costs will be. Sometimes, it might not be worth it to refinance. Also, make sure you will not be penalized for paying off your current loan early – this would be included in your contract. Once you know the interest rate you qualify for and the associated costs of refinancing, you can determine if you'll save on your monthly payments.

These additional costs are no small factor. You can spend up to 5% of the loan amount on closing costs, so you should also try to calculate how you can recoup these fees. Most of this comes down to thinking in the long-term. If you're planning to be in your current home for a while, refinancing and making up these upfront costs is feasible. But, if you refinance and then move quickly, you can lose out on what you would have saved.

Finally, consider how much equity you have in your home. Having at least 20% is a good sign for lenders and you most likely will not need the added expense of mortgage insurance. Check online or contact a real estate agent to understand how much your home is valued at and how much you owe.

As you can see, refinancing can be beneficial, but it ultimately depends on how much you can save on an individual basis. The rule of thumb, according to Investopedia, is that refinancing is a good idea if you can reduce your interest rate by at least 2%.

What will the new year bring?

It's not too late to begin looking into refinancing your mortgage as interest rates are expected to remain low going into 2020. HousingWire consolidated the predictions of leading economists from Freddie Mac and Fannie Mae, finding that the average fixed rate will probably be 3.6% in 2020. This would be the lowest annual average recorded since 1973.

While mortgage rates are ultimately set by bond investors, since the market is stable and inflammation is low, it's safe to assume interest rates will stay low in the foreseeable future.

3 easy steps to refinance your loan with InterContinental Capital Group

If you're ready to refinance your mortgage to take advantage of historically low interest rates, look no further than the experts at InterContinental Capital Group. When applying for a mortgage or refinance loan, there are 3 steps to remember: Credit, capacity and collateral.

If your credit is good, you have the capacity to pay back your loan and the collateral to back it up, you can easily qualify for a refinance loan. With licensed mortgage experts in nearly every state and a diverse selection of loan options, we can assist you in finding the right home loan for your current and future needs. Contact us today to get started.