If you own a home, you’ve probably heard that it’s a good time to refinance your mortgage. And it is! The Federal Reserve began cutting interest rates in July 2019, the first rate cuts since 2008. While you can’t get a 0% interest rate on your mortgage, it may be the perfect time to look at refinancing your current loan.
How Low Are Mortgage Interest Rates?
The Federal Reserve has continued to slash the base interest rate in 2020. As of mid-August, the APR on a 30-year fixed-rate mortgage was roughly 3.04%, and the APR on a 15-year fixed-rate mortgage was about 2.67%.
If you are shopping for an adjustable-rate mortgage, the rates are even lower. They are just over 3% for a 10/1 or a 5/1 ARM and about 2.92% for a 7/1 ARM.
What Is Refinancing?
Refinancing is the process of taking out a different mortgage that will have a new set of terms than your previous one. The idea is that your new mortgage will have better terms, such as a lower interest rate. When you refinance, you completely pay off the first mortgage, so you only have one loan payment in the end.
How Does Refinancing Work?
Refinancing your mortgage is similar to the process you went through to get your original home loan. You’ll look for a suitable lender and then follow their application process. In the alternative, you can use a mortgage broker that works with several lenders.
To determine whether you qualify for refinancing, you’ll need to jump through a few hoops. In general, lenders want to make sure that you meet some minimum requirements:
- Mortgage in good standing – Lenders need to see that you’ve made on-time payments on your current mortgage for at least the past 12 months.
- Home equity – You should have between 10-20% equity in your home.
- Income – You’ll be able to produce proof of regular income and an acceptable debt-to-income ratio.
- Credit – Lenders will also review your credit score.
Even if you fall short on a few of these requirements, you might still be able to find a lender that will give you a better deal than your current mortgage.
When is the Best Time to Refinance Your Mortgage?
Refinancing isn’t for everyone. But if your current mortgage is less than desirable, you may wish to investigate a different loan, a different type of loan, or both. In general, refinancing your mortgage will make sense if you fall into one of these categories:
- You have a high-interest loan – If your existing mortgage isn’t competitive compared to the current market, you should consider refinancing.
- The length of your mortgage is over 15 years – If your original mortgage was for 30 years or longer, refinancing may be the way to lock in a better rate with a 15-year fixed-rate mortgage, allowing you to pay off your home even sooner.
- You have an adjustable-rate mortgage (ARM) – An ARM can get you a low initial APR, but it might cost you more in the long-term if interest rates rise. When interest rates are low, it’s a good opportunity to lock in an affordable rate for the long haul.
- You have a costly second mortgage – If you have a significant second mortgage, you might want to consider financing both mortgages together when you refinance with better overall terms.
If you have questions about real estate in the Lexington, SC area, the Lafayette Team can help. Our team of professionals represents both buyers and sellers of real estate and takes pride in its superior level of service and extensive knowledge of the area. Contact us today to learn more about how our services can help you achieve your goals.