Is 2018 the year to refinance my mortgage?
Considering refinancing your mortgage in 2018?
- Mortgage rates are rising: February saw the highest average rate on 30-year fixed-rate mortgages in four years.
- If homeowners want to refinance into a better rate, time is of the essence, experts say.
- There are other reasons to refinance besides rates, such as shortening the loan term or converting home equity to cash.
- Homeowners seeking to cash-out equity should also consider home equity lines of credit and home equity loans.
- Give yourself enough time to refinance — it takes 30 to 45 days to refinance on average, but can take much longer.
If you’ve been on the fence about refinancing your mortgage, it might be a good time to act. Interest rates are on the rise, meaning the opportunities to save money through a mortgage refinance are diminishing.
“We are seeing the economy showing signs that would enable the Federal Reserve to raise rates,” said Terry Siman, managing director of wealth management firm United Capital Financial Advisors in Philadelphia. “All rates will tend to follow, particularly shorter-term rates, so there is a sort of ‘time is of the essence’ to this that I think should spur people to action.”
February saw the average rate on a 30-year fixed-rate mortgage increase to about 4.5 percent — its highest level in four years. That comes on the heels of the Federal Reserve hiking its benchmark rate three times in 2017, and has indicated plans for further hikes throughout 2018.
The Fed’s benchmark rate is the rate at which banks charge each other to borrow money. The benchmark rate doesn’t directly affect long-term interest rates, such as mortgage rates, but does influence them. When the benchmark rate rises, mortgage rates tend to rise as well.
With mortgage rates on an upward trajectory, do you need to get on the refi bandwagon before it’s too late?
Refinancing a mortgage is not cost-free. A refinance results in a new mortgage, and just like your initial mortgage, you pay closing costs, which can include origination, appraisal and inspection fees totaling as much as 7 percent of the loan amount. Siman said homeowners need to weigh the benefit of refinancing against those costs.
To help them do that, homeowners should think about how long they intend to live in the home, he said. If they are committed to staying in the house for five years — or 60 months — homeowners would need to calculate the cost over that period of time versus the savings over the same period.
Some people refinance in a way that folds the closing costs into the new mortgage. This gives the appearance that there are no out-of-pocket expenses, Siman said. Though it’s not necessarily a bad idea to incorporate the expense of refinancing into the new loan, the expenses don’t disappear.
“It does reduce the monthly savings that might come from just a rate change, so whether your out-of-pocket costs are upfront, or are blended into your borrowing amount, it’s going to have an impact,” he said.
Refinancing can also help homeowners cancel private mortgage insurance (PMI), said Rick Fantucci, a licensed sales manager for Angel Oak Home Loans in Atlanta. Lenders typically require mortgage insurance when homeowners have less than 20 percent equity in their homes. Equity is earned through a down payment during the initial purchase, by keeping up with the monthly payments, and as the home increases in value through appreciation.
Speaking with a mortgage lender can help homeowners sort out their options, Fantucci said. A knowledgeable mortgage professional helps homeowners look beyond interest rates to find a beneficial solution.
“Any time someone calls me for a refinance, I like to start with what they’re presently paying on their principal and interest and … [mortgage insurance],” he said. “And then I also look at the type of loan they’re in and determine what’s a good fit for them. Are they looking to remove PMI? Are they looking to shorten their term? Are they looking to get cash out? There’s benefits other than just lowering an interest rate sometimes.”
When rates don’t matter (as much)
Though interest rates are important, they shouldn’t be your only consideration. If you have a lot of equity in your home and want to turn it into cash, there are several financing products that allow you to do just that.
One is a cash-out refinance, which allows you to take out a new mortgage for more than you currently owe, and keep the difference as cash. The money can be used for virtually any purpose, such as a home remodel project, paying down bills or investing opportunities.
Fantucci, who has been in the mortgage business for 20 years, said he’s always had a steady stream of refinance business, even when rates go up. That’s because there is always a contingent of borrowers who can refinance to get cash out of their homes.
“There’s been a good accumulation of equity in these homes, and there’re opportunities out there,” he said. “What I see a lot is when the rates go up, you see more cash-out refinances.”
There are other ways to get cash out of your home. In addition to cash-out refinances, there are home equity lines of credit (HELOCS) and home equity loans (also known as an HEL or a second mortgage cash-out).
HELOCs generally come with a variable rate, much like a credit card. Typically, there’s an introductory period where the rate remains fixed — sometimes up to 12 months, but usually more like six months, Siman said — but after that, the interest rate can adjust monthly, and sometimes even more frequently. A cash-out refinance, on the other hand, typically comes with a fixed rate.
Home equity loans are a third option — one Siman called the “middle ground,” because their rates can sit below HELOCs and cash-out refis. Home equity loans tend to have shorter terms than refis — three, five or seven years — so they tend to have higher rates than a HELOC’s initial rate, but lower rates than longer-term mortgages.
Though borrowers tend to prefer the fixed rate of a cash-out refi or HEL, there are times when an adjustable-rate HELOC can be a better option, Siman said. The interest rate on a HELOC typically starts out lower than fixed-rate alternatives, so if you know you’re going to be selling the house soon, a HELOC can actually be less costly.
Siman offered an example of a hypothetical couple living in a home they intend to sell in a year or two. Such a couple may benefit from a HELOC to finance improvements to attract buyers.
“In that example, the variable option will probably start out costing less than a fixed-rate option, so that’s the better option for them, because they’ll be paying that off when they move on in one or two years,” he said. “But for most people who are thinking about a mortgage, which is typically a longer-term obligation, a fixed rate is a better option and you typically just need to accept the fact that it probably will start off higher than [the rate at which] your local bank is advertising their HELOCs.”
Give yourself time
If you intend to refinance your mortgage in 2018, keep in mind that it’s not an overnight process. If you refinanced before the housing crash and think you know the drill, be aware that it’s not as easy as it used to be. It’s a whole different ballgame now, and you need to account for the extra time and effort, Siman said.
A conventional mortgage can take between 30 and 45 days on average, but hiccups along the way can drag it out. An appraisal may take longer in some areas of the country, for example, or the underwriter may run into difficulties trying to approve your loan application.
“There are a lot more banking regulations to follow, and there are a lot more t’s to cross and i’s to dot,” Siman said. “And as a result, it’s something that takes a little bit longer than people expect, and they should get onto it (quickly).”