Should you refinance your home?

Many homeowners shop around to refinance their mortgage rates and replace their original mortgage loan with one that has a better interest rate or better loan term. These rates depend on the area in which the homeowner lives and are generally less than his or her current rate.

A cash out refinance is a different type of refinance mortgage that helps homeowners perform important home improvement tasks and renovations. This is slightly different from a home equity loan, which does not replace the current mortgage but acts as an additional line of credit. 

Home refinance rates can vary with time. Homeowners must carefully consider their situations before choosing to refinance, as the rates may increase when they make their decision. Some homeowners can mistakenly increase the amount of interest they pay rather than decrease it.  

If you are a homeowner, then it is important to understand the different refinance rates and various types of refinancing options available. Read below to learn more about refinancing and current rates. 

Reasons to Refinance Mortgage Rates

Most homeowners refinance their mortgage rates to pay less interest on their homes. Refinancing can potentially save thousands in the long-term, but it all depends on the homeowner’s current interest rate, loan term and property value. 

Getting lower home refinance rates is the most common reason for homeowners choosing to get a new mortgage. Refinancing involves taking out another mortgage to pay the first one off completely. The new mortgage comes with a new interest rate and loan term.

A cash out refinance allows homeowners to make important home renovations, which is another common reason for refinancing. This type of refinancing involves getting a new mortgage that is larger than the original to allow for extra cash for home improvement projects. 

Another reason to refinance is to eliminate mortgage insurance. Some homeowners have mortgages that require private mortgage insurance (PMI), such as FHA loans. They can eliminate PMI by refinancing an FHA loan to a conventional loan. 

Others choose to refinance their mortgage rates to shorten their loan term. Most traditional loan terms span 30 years. Although, refinancing to 15 years may not cost all that much more than a 30-year mortgage with today’s low interest rates. 

Home Refinancing Methods 

Different refinanced mortgage rates are available through various types of refinancing options. There are a handful of viable refinancing methods available. A homeowner’s choice depends on a few key factors, including current property value, credit score and ultimate housing goals.

A rate and term refinance is the most common type of refinancing a home loan. With this method, a homeowner’s current mortgage is paid off using a new mortgage with a new rate and term. This type of loan is ideal for anyone interested in a lower rate or different term. 

A cash out refinance is another refinance option that is designed for homeowners looking to make renovations. This type of refinancing method requires a new mortgage that is larger than the current mortgage to account for home renovations. This involves pulling equity, or how much of a house the owner currently owns, to pay for renovations.

The Home Affordable Refinance Program (HARP) was a program that helped borrowers refinance mortgage rates up to 125 percent of the value on their home. The program was established during the mortgage crisis and is ideal for borrowers who are “underwater,” or are paying more than their home is actually worth. It expired in 2018, but there are many other copycat programs that apply the same benefits.

When to Refinance Mortgage Rates

Refinanced mortgage rates may be lower than the rate of interest on your current mortgage. If so, refinancing could mean saving hundreds, if not thousands, over the long run. This is a great reason to refinance, but only when the rates play out in this manner. 

In general, mortgage rates have been falling for quite some time. Homeowners who secured a mortgage at the peak rate can save ample money in interest. However, rates will not always fall and there may be certain times when rates spike. It is always best to refinance during a period of falling rates.

But how much must home refinance rates fall in order to make it worth it? There is a quick and easy rule of thumb that most investors recommend when considering refinancing. In general, if your new rate is at least one to two percent below your current rate, refinancing is a solid option.

It also depends on your current mortgage value. If you have a $1 million mortgage, a one percent interest difference will save you a whole lot of money. However, if you have a $100,000 mortgage, one percent will not make much of a difference. Plus, there are other costs and fees associated with refinancing your mortgage rates that could make your mortgage higher. 

Another great time to refinance is when your home value has increased. If you owe less than what your home is worth, a cash out refinance can provide you with the difference in cash to pay off high interest debt, perform home renovations or make major home purchases.

If you have bad credit, then the interest rate on your mortgage is likely to be a bit higher than the national average. However, when your credit score improves, refinancing can help you secure a better rate. Aim to improve your score before refinancing for the best rate options.

Refinancing a Mortgage with Bad Credit

Many find themselves in a refinance mortgage bad credit situation. They want to lower their interest, but their credit score simply does not give them the chance. However, there is hope for those with bad credit as there are many refinancing options available. 

Certain programs were created for borrowers who wish to refinance their mortgage with bad credit.  Many of these programs do not check your credit when you inquire about a home refinance loan. There are, however, a few strict requirements for programs such as these, like:

  • You must have made on-time mortgage payments for a certain number of months.
  • The loan-to-value ratio must be greater than at least 75 percent. 

Borrowers with poor credit who currently hold FHA-secured mortgages should inquire about the FHA streamlined refinance program to refinance their mortgage rates. The program does not require credit checks or appraisals. 

However, it is important to understand that the purchase price of the home stands as the current value. This can be beneficial when the actual home value price is less than the purchase price. It can be hurtful to borrowers whose homes are worth more now than they were at the purchase price.