Options for Refinancing Your Home in 2019
One of the big stories in real estate in 2018 was rising interest rates, and market watchers expected rates to continue to move higher this year.
That’s no longer the case. The higher rate sentiment has been replaced by a lower rate reality that has now brought average rates below 4% for the first time since 2017, according to the Freddie Mac Primary Mortgage Market Survey.
If you’ve been wondering whether you’re eligible for better rates on your mortgage, now may be the time to consider your refinancing options. We’ll discuss some reasons you might want to consider a refinance, and provide refinance options to consider while rates are lower.
- Why you might refinance your mortgage in 2019
- Refinancing options for homeowners in 2019
- New options for underwater homeowners
Why you might refinance your mortgage in 2019
If you took out a mortgage at the end of 2018 when rates hit a multiyear high, the current low rate market could translate to significant interest savings if you refinance. Also, if you financed your home with an FHA or VA loan, you may be eligible for refinance programs that don’t require proof of income or an appraisal.
If you’re unsure whether refinancing makes sense for you, evaluate your current circumstances and compare then with when you first took out the loan. Has your income increased significantly? Have you paid down large debts? A boost in earnings and credit score could qualify you for a better rate than you were originally offered.
You might also opt to refinance if you have an adjustable-rate mortgage (ARM). Refinancing to a fixed-rate loan can provide stability in your monthly expenses, allowing you to budget more easily. This can also ease your mind if you’re worried that your mortgage payments will become unwieldy for your financial circumstances.
Perhaps your payments already seem unwieldy. Refinancing can help here as well. Consider a scenario in which you have been paying on your 30-year mortgage for seven years. You may choose to refinance to a new 30-year mortgage. This extends your repayment period and lowers your monthly installment amounts.
On the other hand, if you’re motivated to pay off your mortgage sooner and therefore pay less interest overall, you can refinance to a shorter term like a 15-year fixed loan. Your payment will go up, but you’ll save in interest over the life of the loan, and build equity much faster than a 30-year fixed loan.
Consider the equity in your home as well. Home equity is the difference between your loan balance and the value of your home. Home prices went up an average of 4.9% year to date as of February 2019, according to the Federal Housing Finance Agency, and higher property values mean more equity. Doing a cash-out refinance could provide you with cash to renovate your house, consolidate debt or use toward other financial goals.
Even if you think you might put your home on the market a few years down the road, refinancing could be your best option. The past four years have been a boom time for sellers, but the market is shifting in favor of buyers. There’s potential for a slowdown, so you may not be able to sell your home as quickly as you anticipate. Or you may opt to stay in the property until prices climb and demand heats up again. In either case, a lower interest rate may be useful.
Of course, you’ll want to take your selling timeline into consideration. When you refinance, you’ll need to pay closing costs on the new mortgage, so you want to make sure you’ll be in the house long enough for those expenses to be worth it.
Closing costs should also factor into the decision if you plan to stay in your house long term. You want to make sure the new rate you’re offered is enough of an improvement on the previous one to justify paying several thousand dollars in closing costs on the refinance loan. The best way to determine this is to calculate the breakeven point on your refinance. Divide the closing costs by the monthly savings, and if you’ll be in the house longer than the number of months it takes to break even, then the refinance makes sense.
Talk with your lender or a financial advisor before deciding whether to refinance. You can start by using LendingTree’s mortgage refinance calculator to estimate how much you stand to save.
Refinancing options for homeowners in 2019
If you’re considering refinancing in 2019, here are some other mortgage products to consider.
A traditional fixed-rate loan has an interest rate that remains unchanged for the life of the mortgage. Regardless of what happens in the market, you’ll continue to pay the same amount each month. Fixed-rate loans are a good choice if you’re financially conservative and risk-averse, or if you’re uncertain whether your income will increase substantially within the next several years. A fixed-rate mortgage enables you to predict your housing expenses throughout the life of the loan.
One newer feature of conventional refinances in 2019 is the property inspection waiver (PIW) or automated collateral evaluation (ACE) offered on eligible properties. If the automated underwriting system accepts your estimated value, you may not be required to have an appraisal, saving you the $300 to $400 an appraisal normally costs.
Adjustable-rate mortgages (ARMs)
ARMs typically include lower interest rates for the first several years of the loan, after which the rate will change based on a specified schedule. For instance, in a 10/1 ARM, you would pay a fixed rate for the first 10 years, after which the rate could increase every year until the loan is paid off.
An ARM might be attractive if you plan to sell your home before the introductory rate period ends. However, if you can’t sell before the variable rate period begins, you may have to make higher payments. Refinancing your ARM now may not save you much in your monthly payment, but it will eliminate the chance that your payment could increase in the future.
Adjustable-rate mortgages may also appeal you if you’re reasonably certain you’ll see an earnings increase before your variable rate begins. Perhaps you’re in an apprenticeship role that will lead to a well-paid position within the next few years. Then you might feel comfortable taking on an ARM, as you’ll likely be able to afford the potential higher payments. But if that earnings increase doesn’t happen for some reason, you could find yourself struggling to cope with the increased payments.
Cash-out refinancing involves refinancing your mortgage for more than you currently owe, allowing you to take out the difference in cash. This is different from a traditional refinance, in which you’re refinancing the terms of the loan — perhaps for a longer repayment period or better interest rate — but not receiving any additional money.
With a cash-out refinance, you may be able to secure a more favorable rate and a more comfortable repayment schedule. But you’re also borrowing cash against the equity of your house, and you can use that money to pay off other debt, put on an addition to your home — or however you see fit.
Bear in mind that you’ll likely need at least a 620 credit score to qualify for a cash-out refinance, and you must have at least 20% equity left in the home after the new loan if you are refinancing to a conventional Fannie Mae or Freddie Mac loan and want to avoid mortgage insurance.
FHA cash-out refinance loans allow you to borrow up to 85% of the value of your home, but they come with the drawback of added mortgage insurance requirements, regardless of how much equity you have. Mortgage insurance insures the lender against loss, and adds to your monthly payment.
If you are an eligible active-duty service member or a veteran of the military, you can borrow up to 100% of the value of your home with a VA cash-out refinance. The extra cash-out has to be used to improve your overall financial situation or make improvements to your home — if you want the cash for other purposes, you may be restricted to borrowing a maximum of 90% of your homes appraised value.
The FHA streamline refinance may be an option if you currently have an FHA loan. You likely won’t need to pay for a new appraisal or provide proof of income or employment.
However, you won’t be able to do a cash-out refinance as you would with a standard refinance. You can take out $500 with the FHA streamline, but that’s the maximum you’re allowed. The primary focus here is reducing your payments and interest rate. Because of the streamlined documentation requirement, many lenders offer a discounted fee for approving an FHA streamline, which adds to the savings you’ll realize from not needing an appraisal.
If you took out your current loan at the end of 2018, make sure you have a copy of your note and deed of trust handy. You won’t eligible to close until at least seven months (210 days) has passed since your first payment on your current loan.
VA Interest Rate Reduction Refinance Loans (IRRRL)
To qualify for a VA IRRRL, your current mortgage must be a VA loan. Additionally, the refinance only applies to your primary residence, and all payments for the past year must be current. As with the FHA streamline program, you won’t be subjected to an appraisal, and no income documentation is required. You can also roll your closing costs and fees into the loan, decreasing (or eliminating) your upfront expenses.
Like the FHA streamline, at least seven months must have passed since you made your first payment on the loan you are refinancing. The VA also requires that the breakeven on your costs be no longer than 36 months.
New options for low-equity homeowners
In wake of the financial crisis, many homeowners found themselves underwater on their mortgages — meaning they owed more on their loans than their homes were worth. The federal government instituted the Home Affordable Refinance Program (HARP) to provide relief to qualifying borrowers who struggled to make their payments and wouldn’t be eligible for other home refinance options.
Millions of borrowers refinanced their mortgages through HARP, according to the Federal Housing Finance Agency.
The program ended on Dec. 31, 2018, but there are other refinancing options for homeowners who are struggling this year.
Fannie Mae and Freddie Mac now offer refinancing for high LTV mortgages that originated on Oct. 1, 2017 or later. The new programs allow borrowers with 3% equity to refinance, whereas 5% was the previous threshold.
Here are some of the highlights and requirements of these programs for equity-poor homeowners currently being offered.
|Minimum Requirements for Refinance Programs|
|Program type||Max DTI||Minimum FICO||Special requirements|
|Fannie 97%||50%||620||Must be current Fannie Mae loan|
|Fannie HomeReady®||50%||620||Must be current Fannie Mae
Income restrictions apply
|Freddie Home Possible Advantage®||50%||620||Income restrictions may apply|
A few things to note: These minimum requirements assume that your loan receives approval from the automated underwriting system. If it doesn’t, the loan may be “manually underwritten,” in which case higher credit score requirements or additional payment reserve requirements may apply.
A payment reserve is an extra monthly payment in a banking account like checking or savings. For example, if you are required to have a six-month payment reserve to be approved for a loan, that means you need six months’ worth of mortgage payments in the bank, in addition to whatever money you’ll need for closing costs.
The bottom line
Interest rates are dropping, creating a great opportunity to save money on what is usually your largest monthly expense — your mortgage payment. Homeowners who plan to sell their homes within the next several years may be able to use a strategic refinance to decrease their payments and save money ahead of their moves.
If your equity has increased, you may be able to access some of it to pay off high interest rate credit cards, or make improvements to your house to potentially increase the value even more.
Analyze your short- and long-term positions and work with your lender or financial planner to analyze all the costs and benefits of refinancing in the current rate environment.
The information in this article is accurate as of the date of publishing.