Refinancing your mortgage might seem like a great way to free up a little cash and lower your monthly expenses. The reality, according to Kadi McMillan, is no one is actually doing that right now unless they absolutely have to.
McMillan is a Tulsa-based executive loan officer with Rocket Mortgage. She says refinancing has become an emergency move for homeowners because of where interest rates currently sit.
“There really aren’t very many people right now that are in the ballpark to refinance,” McMillan said. “Everybody refinanced during COVID, when rates were at three and a half (percent).”
If you have refinancing on the brain, here’s when you might consider it.
Monitor interest rates
If you’re looking for a lower interest rate, set those alerts for mortgage reports. The more you’ve paid on your home, the lower you’ll want to see the market rate.
McMillan says you usually want market rates to be around 2% lower than your interest rate when the remaining balance on your mortgage is low. Tulsa’s mortgage rates hover around 6-6.5% right now. So you’d want your current interest rate to be around 8-8.5% to consider refinancing.
If you still owe quite a bit on your home, refinancing may be worth it when market rates are closer to 1% lower than your rate. Let’s say you have $400,000 left to pay. Then you’d need your interest rate to be around 7-7.5% based on Tulsa’s current mortgage rates.
Make a ‘second down payment’
Maybe you have some extra cash on hand. You can use that like another down payment and refinance the total amount you’re paying. Since your mortgage balance would be lower than what it was before, your monthly payment would decrease as well, even if your interest rate stays the same.
Cash out on equity
You can refinance and cash out some of your home equity now, which is the portion of your home you own outright. This one can be a bit trickier and involves more math, depending on your current mortgage balance and your home’s market value.
Let’s say you want to do some home renovations and need extra cash. McMillan uses this example:
You bought your home nearly 10 years ago for $250,000 and put a 20% down payment ($50,000). That means your mortgage loan was $200,000.
Now, your house is worth $350,000, and since you’ve been slowly paying off your mortgage, you only owe $160,000. So you have $190,000 in equity because your home has increased in value and you’ve paid off some of your mortgage.
Lenders usually only let you borrow up to 80% of your new, increased value, or $280,000 in this example. When you refinance your home for a higher mortgage, you can access some of that new equity.
McMillan says if you refinance your loan for $200,000, you could then gain $40,000 in cash since you’ve paid $160,000 already.
The flip side of this is that you owe more money in the long run, so your monthly payment and interest rate could increase.
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