Options for Refinancing Your Home in 2019
One of the big stories in real estate in 2018 was rising interest rates, and that headline remains relevant in 2019. In mid-January 2018, the average rate for a 30-year fixed rate mortgage was 4.04%, according to the Federal Reserve Bank of St. Louis. At the start of 2019, it was 4.51%. Freddie Mac, the government-sponsored enterprise (GSE) that guarantees conventional mortgages, expects rates on 30-year fixed mortgages to average 5.1% this year and 5.6% by 2020.
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.
What’s new: Why you might refinance your mortgage in 2019
Although interest rates are rising, they’re still below historic norms. At the beginning of 2008, the average rate for a 30-year fixed rate loan was 6.07%. If you weren’t able to refinance in the post-recession years, when rates frequently fell below 4%, you may still be able to lock in a more favorable rate than you’re currently paying.
If you’re unsure whether refinancing makes sense for you, evaluate your current circumstances versus where you were 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 opt to refinance if you have an adjustable-rate mortgage (ARM) as well. As interest rates rise, so will your monthly payments. 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 a minimum of 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 keen to pay off your mortgage sooner and therefore pay less interest overall, you can refinance to a shorter-term loan.
Consider the equity in your home as well. Home prices increased by 6.5% between 2017 and 2018, 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. If you plan to list the house in, say, the next 12 months, keeping your current rate may be the better choice.
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.
You’ll likely want to talk with your lender or a financial adviser before deciding whether to refinance. However, to start, you can use LendingTree’s mortgage refinance calculator to estimate how much you stand to save.
What’s new: A farewell to HARP
In the 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.
HARP applied only to Fannie Mae- and Freddie Mac-guaranteed mortgages, and borrowers had to prove they hadn’t been late on more than one payment in the 12 months before applying for the program. Their loan-to-value (LTV) ratios also had to be 80% or more.
HARP refinances were faster and more streamlined than standard refinances because they didn’t require appraisals, which reduced the closing costs associated with the loan and the time it took to complete the process. More than 3 million 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 program allows borrowers with 3% equity to refinance, whereas 5% was the previous threshold.
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 unchanging interest rate. This means that, 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 you’re uncertain whether your income will increase substantially within the next several years. A fixed-rate mortgage enables you to forecast your expenses throughout the life of the loan.
Adjustable-rate mortgages (ARMs)
ARMs typically include lower interest rates for the first several years of a loan, after which the rate will increase 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 would 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’ll have to make the higher payments. You may be able to refinance to a fixed-rate loan at that time, but there’s no guarantee you’ll be able to secure a favorable interest rate then.
Adjustable-rate mortgages may also appeal 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 higher payments. But if that earnings increase doesn’t happen for some reason, you could find yourself struggling to cope with the increased payments.
A cash-out refinance loan allows you to refinance 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 as well. But you’re also borrowing cash against the equity of your house, and you can use that money to pay off other bills, put on an addition or however you see fit.
Bear in mind that you’ll 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.
The FHA streamline refinance may be an option if you have an FHA loan. You likely won’t need to undergo a credit check to qualify, nor will you 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. Fortunately, your closing costs will likely be less than you’d pay with a more traditional refinance, thanks to the appraisal and credit checks being waived.
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 or credit check, even if you currently have an underwater mortgage. You can also roll your closing costs and fees into the loan, decreasing (or eliminating) your upfront expenses. Keep in mind that you cannot use an IRRRL as a cash-out refinance, so this is really about lowering your rate and payments.
The bottom line
Interest rates are increasing, but they’re not the only factor to consider in whether you should refinance. If you’ve had a substantial improvement in your financial circumstances, you may still be able to obtain a lower rate. 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.
However, it’s important to pay attention to the local and national market to gauge whether you’ll be able to sell on your terms. You don’t want to refinance to an ARM you can’t afford, nor do you want to refinance and then sell before you’ve recouped your closing costs.
Analyze your short- and long-term position and work with your lender or financial planner to determine whether refinancing makes sense for you in the current rate environment.