Options for Refinancing Your Home in 2018
Heading into 2018, interest rate conditions remain excellent for refinancing. Indeed, mortgage rates have been so low for so long that many people who had the opportunity to lower their interest rates by refinancing may have already done so. However, there are other home refinancing options besides just replacing your current mortgage with a similar loan at a lower rate.
Whatever the reason for refinancing, low-interest rates make refinancing options for homeowners more attractive. So, the key questions this year are:
- How long will mortgage rates remain low?
- What home refinancing options could benefit you this year?
What’s new: Home loan refinancing trends for 2018
Thirty-year mortgage rates began 2018 at 3.99 percent —about 0.20 percent lower than they had been a year earlier. Mortgage rates have now been below 4.50 percent for most of the past six years, a long enough time that this rate environment might have started to feel normal. The reality is that from a historical standpoint, it is anything but normal.
Looking at mortgage rate history dating back to the early 1970s, 30-year rates have averaged 8.15 percent. In other words, current mortgage rates are less than half the historical norm, signaling just how unusual the recent environment has been.
Perhaps not surprisingly, both the Mortgage Bankers Association and Freddie Mac expect mortgage rates to rise in 2018. And, as it so happens, when rates rise, the number of folks scrambling to refinance their mortgages rises as well.
Even without rising mortgage rates, refinancing activity has already been slowing, in large part because rates have been low for so long many people in a position to reduce their interest rates by refinancing have already done so. However, homeowners should recognize that there are other compelling reasons to refinance beyond taking advantage of falling mortgage rates.
A fast-growing reason for refinancing is the opportunity to access home equity. The recovery in housing prices in recent years has led to a buildup of homeowner equity. While a home equity loan or line of credit may seem the obvious way to tap into this equity, homeowners should first consider whether there might be a broader benefit to restructuring their mortgage debt completely by using cash-out refinancing as the means of borrowing against equity.
Besides taking advantage of a low-rate environment or using cash-out refinancing, other reasons to refinance include lowering your interest expense by shortening the repayment period or lengthening the repayment period to make monthly payments more affordable.
What all these refinancing goals have in common is that low mortgage rates are a big part of what makes the opportunity attractive. Recognizing how unusual current rate levels are should give homeowners a sense of urgency heading into 2018, so they can refinance before rates return to more normal levels.
Refinancing options for homeowners
The best refinancing option depends on what your goals for refinancing are. There are different types of loans that can perform different functions depending on your needs and situation. You should also be aware of various government programs that can make your refinancing goals easier to implement.
As you consider various approaches to refinancing, you will often find that there are trade-offs involved, such as paying a fresh set of closing costs in exchange for the opportunity to lower your interest rate, or raising your monthly payments in order to reduce your total interest expense by shortening the loan term. A refinance calculator is a useful tool for evaluating whether the net impact of these trade-offs will be in your favor.
Types of loans
Before you start shopping for specific mortgage rates from lenders, you should decide what type of loan you want. This will allow you to get the right type of mortgage rate quotes, and make apples-to-apples comparisons between lenders.
The following will look at the major types of loans available for refinancing, including fixed-rate loans, adjustable rate loans, and cash-out refinancing.
Fixed-rate mortgages, which are home loans that lock in a constant interest rate over the entire repayment period, are so common that you might think of them as the “plain vanilla” of home loans. However, they may be more versatile than you think, allowing you to accomplish a variety of refinancing goals.
Given the low interest-rate environment of recent years, perhaps the first thing that comes to people’s minds when the subject of refinancing comes up is to see whether they could replace their current mortgage with one at a lower interest rate. Though most people who could benefit from this have probably already refinanced, there are always some homeowners who take longer to get around to these things. If so, 2018 would be a great time to finally act, because there is no telling how long mortgage rates can remain so unusually low.
Let’s say you already refinanced in recent years, or you got your mortgage after rates had already fallen. In that case, current market rates may not be much different from your existing mortgage rates. However, there are still ways you could benefit financially by refinancing with a fixed-rate mortgage.
Your credit has improved. For one thing, if you’ve owned your home for a few years you may have a better credit record now than when you last got a mortgage, and you also may have built up a healthy amount of equity in your home. Either one or both of those developments could help you qualify for better mortgage terms than when you first bought the house. This may pay off in the form of a lower interest rate, or the opportunity to eliminate mortgage insurance payments.
Your income has gotten a boost. Also, you may now be able to afford a shorter-term mortgage. This might be because your income has improved, or simply because you’ve already paid down several years’ worth of loan principal. While a shorter repayment period typically means higher monthly payments, there are two ways it can pay off in the long run.
Currently, 15-year fixed rate mortgages have interest rates that are more than half a percent lower than 30-year rates. Besides allowing you to capture a lower rate, shorter mortgages mean that you will pay interest over less time, which should reduce the total interest expense of the loan. Either or both of these can be a compelling reason to shorten your mortgage term, even if market rates generally have not changed much since you got your current mortgage.
To consider a move in the opposite direction, a case can be made for lengthening your repayment period if you are having trouble making your monthly payments. For example, let’s say you’ve been paying off a 30-year mortgage for 10 years. Rather than repay the remaining loan principal over the next 20 years, you could spread that same principal over 30 years by refinancing into a fresh 30-year mortgage. While this is likely to result in more interest expense in the long run, that may be worth it if lowering your monthly payment helps you stay in your home.
Fixed-rate mortgages provide the certainty of steady interest rates and monthly payments. Beyond that though, market changes, improvement in your credit standing or adjusting your repayment term can allow you to accomplish a variety of different things with fixed-rate mortgages.
Adjustable rate mortgages
As the name suggests, adjustable rate mortgages have interest rates that are subject to change as market conditions change. The way they are structured often entails locking in a fixed rate for an initial period of years, after which the mortgage rate will reset at regular intervals, depending on market conditions.
Obviously, if you think interest rates are likely to fall, an adjustable rate mortgage could be a way to make sure you automatically benefit. Currently, though mortgage rates are already unusually low, so why would anybody choose an adjustable rate mortgage in today’s market?
One answer is that you might be in a situation where you could get an immediate benefit from an adjustable rate mortgage, while also eliminating the risk that your rate could rise in the future. In terms of the immediate benefit, the average adjustable rate mortgage with a five-year initial fixed-rate period followed by annual rate adjustment currently has a rate that is half a percent lower than the rate on the average 30-year fixed rate mortgage. Historically, that rate differential has been even wider, meaning the immediate benefit for an adjustable rate mortgage can be even more compelling.
In terms of limiting the risk of future rate increases, suppose you plan to sell your house in a few years or otherwise expect to be able to pay off the mortgage early. In that case, you could refinance to an adjustable rate mortgage with an initial lock-in period that is longer than the time you expect it will take before you move or pay off the mortgage. In that case, you could reap the immediate benefit of the lower rate on an adjustable rate mortgage, without the long-term risk of fluctuating rates and payments.
A combination of net loan repayments and rising home values has restored the total amount of home equity in the U.S. to levels not seen since before the housing crisis. This gives homeowners a financial resource they can tap into by borrowing against it.
While homeowners can borrow against equity via a home equity loan or line of credit, there are also situations where it makes more sense to access home equity via cash-out refinancing. This means refinancing by borrowing more than the existing balance of your mortgage. The extra money will be available for use however you see fit, though that extra borrowing will reduce the equity in your home.
Naturally, if the interest rate on the existing mortgage can be lowered while also borrowing against equity, cash-out refinancing makes sense. Also though, borrowing against equity via one primary mortgage rather than adding a secondary mortgage might qualify you for better terms on the equity portion of the loan. Finally, if you could benefit by restructuring the existing mortgage (e.g., by changing the repayment period or switching between an adjustable- and a fixed- rate loan), including a cash-out element would save you the expense of initiating a separate home equity loan.
Government refinancing programs
Besides favorable interest-rate conditions and rising home equity values, another thing that helps facilitate refinancing in 2018 is a selection of government programs designed to help homeowners take advantage of lower interest rates. Here are some prominent examples:
It’s back! Though it has repeatedly been slated for expiration, the Home Affordable Refinance Program (HARP) has been extended through the end of 2018.
HARP helps people with mortgages owned by Fannie Mae or Freddie Mac refinance even if their mortgages exceed normal lender loan-to-value guidelines. While this assistance has become less relevant as housing prices have recovered, if you live in an area where real estate values remain depressed, HARP could give you one last chance to refinance while interest rates are still low.
Mortgages owned by Fannie Mae or Freddie Mac are what’s known as conventional mortgages. If instead, you have an FHA mortgage, there is a program that can make it easier for you to refinance, even if you have little or no equity in your home.
The FHA Streamline Refinance program allows for refinancing with limited credit documentation and underwriting. Your current loan must be insured by the FHA, and your payments must be up-to-date. Also, the new loan must be one with more favorable financial terms than your existing mortgage, and cash borrowed against equity is limited to $500.
While the FHA Streamline Refinance program may facilitate refinancing for you, don’t necessarily assume that just because you have an FHA loan currently that you should refinance for another FHA loan. If your credit history has improved considerably since you got your last mortgage, and/or if equity in your home now exceeds 20 percent of its value, you may qualify for better terms with a conventional loan. These better terms may include a lower interest rate and/or the ability to avoid paying mortgage insurance.
A VA Interest Rate Reduction Refinance Loan (IRRRL) has some similarities to the FHA Streamline Refinance program in that it allows for approval with limited credit check and underwriting procedures in certain situations.
In the case of a VA IRRRL, you must have an existing VA loan and either be able to lower your interest rate by refinancing or be switching from an adjustable- to a fixed-rate mortgage.
As with all VA home loans, a significant advantage of the IRRRL, if you qualify, is that it does not require mortgage insurance.
There’s also a VA Loan cash out refinance option, which you can read more about here.
Evaluating your home refinancing options for 2018
Low-interest rates help make all refinancing options more attractive, but as you evaluate your home refinancing options for 2018 keep in mind that there can be benefits to refinancing besides lowering your interest rate. These can include tapping into home equity, restructuring the length of your repayment period or switching between fixed- and adjustable-rate loans.
Besides the various benefits of refinancing, your home refinancing options include government programs which can make refinancing easier. As you evaluate your range of options, keep in mind that what they all have in common is that today’s low-interest rates help make all those options more feasible. Current mortgage rates are less than half their historical average, making 2018 an excellent opportunity to refinance — and one that may not last.